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JPMorgan India Smaller Companies Fund
Mid cap stocks are stocks of companies having high growth potential over longer time frame. To put it simply, they have the potential of being large caps of future. But having said that mid cap stocks are high risk-high return investment proposition as they aim to generate wealth by generating a superior alpha returns (as compared to large caps). However, during turbulent times they tend to plunge more thus making them a risky investment proposition. Hence the funds focusing on the mid cap segment are ideal for investors willing to take high risk for relatively higher gains.
JPMorgan India Smaller Companies Fund (JISCF) is an open-ended equity growth fund from JPMorgan Mutual Fund following a blend style of investing. JISCF is mandated to invest primarily in equity and equity related instruments, along with debt and money market instruments. Launched in December 2007, the fund has completed almost 4 years of existence.
Investment Objective and Proposition
The fund's primary investment objective is "to seek to generate long term capital appreciation from a portfolio that is substantially constituted of equity and equity related securities focused on smaller companies. Generally, the universe will be the companies constituting the bottom fourth by way of market capitalisation of stocks listed on the National Stock Exchange or the Bombay Stock Exchange. The fund manager may from time to time include other equity and equity related securities outside the universe to achieve optimal portfolio construction."
The fund is mandated to invest 65% - 100% of its total assets in equity and equity related securities of smaller companies, upto 35% in equity and equity related securities of companies other than smaller companies and upto 35% in debt and money market instruments.
Over the past one year, the funds exposure to large-cap stocks has been in the range of 8% - 27%, while its exposure to mid and small cap stocks has ranged between 23% - 79% of its total assets. It is noteworthy that JISCF has 47% to 51% of its total assets under unclassified equities, which seem to be from the small cap segment. Despite having high exposure to mid and small cap stocks, JISCF has managed to limit the downside in the last 1 year. However, it has missed out on the midcap rallies of the past.
Allocation to debt & cash has ranged between 4% - 7% over last 1 year indicating the tendency of the fund manager to stay invested in equities and refraining from taking aggressive cash calls.
Equity Portfolio
| Holdings | Jul 2011 | Aug 2011 | Sep 2011 | Oct 2011 | Nov 2011 |
| GSK Consumer Healthcare Ltd. | 3.8 | 4.2 | 4.3 | 4.2 | 4.8 |
| Yes Bank Ltd. | 3.8 | 2.5 | 4.1 | 4.9 | 4.7 |
| Indraprastha Gas Ltd. | - | 3.0 | 3.6 | 3.6 | 3.8 |
| DiviS Laboratories Ltd. | 3.3 | 3.2 | 3.4 | 3.5 | 3.7 |
| Shree Cement Ltd. | - | - | 1.7 | 2.9 | 3.5 |
| Godrej Consumer Products Ltd. | 2.7 | 3.1 | 3.0 | 3.3 | 3.3 |
| Titan Industries Ltd. | 3.6 | 3.4 | 3.3 | 2.6 | 2.8 |
| ACC Ltd. | - | - | - | - | 2.7 |
| Torrent Power Ltd. | 2.6 | 2.7 | 2.7 | 2.8 | 2.7 |
| CRISIL Ltd. | 2.8 | 3.0 | 2.9 | 2.4 | 2.7 |
As indicated in the table above, JISCF's top-10 equity portfolio constitutes of all 'A' group stocks. JISCF is benchmarked against the S&P CNX Midcap index and follows the bottom up approach of investing. The fund endeavours to invest in companies with:
· Strong growth potential
· Special products which have a particular market niche and therefore good earnings potential
· Undertaking corporate restructuring.
As on November 30, 2011, top-10 stocks comprised of 34.7%, while top-5 sectors accounted for 23.2% of its total portfolio. The fund manager has the tendency to churn the portfolio moderately as revealed by the portfolio turnover ratio of 1.14 times.
How LOF has fared vis-à-vis its peers
| Scheme Name | 6-Mth (%) | 1-Yr (%) | 3-Yr (%) | 5-Yr (%) | Std. Dev. (%) | Sharpe Ratio |
| HDFC Mid-Cap Oppor (G) | -16.2 | -15.5 | 27.2 | - | 7.26 | 0.27 |
| Sundaram Select Midcap (G) | -18.7 | -21.4 | 23.4 | 6.2 | 10.23 | 0.19 |
| Principal Emerging Bluechip (G) | -21.9 | -33.3 | 23.3 | - | 9.48 | 0.19 |
| JPMorgan India Smaller Cos (G) | -19.4 | -23.0 | 20.0 | - | 8.56 | 0.18 |
| SBI Magnum MidCap (G) | -17.5 | -24.5 | 18.3 | -3.9 | 11.15 | 0.15 |
| HSBC Midcap Equity (G) | -28.2 | -42.1 | 8.1 | -6.6 | 9.67 | 0.08 |
| CNX Midcap | -22.4 | -28.7 | 16.6 | 3.7 | 8.83 | 0.15 |
The table above reveals that JISCF has been an average performer in the category, as over a 3-Yr time frame it has clocked a return of 20.0% CAGR. However, it has managed to outperform its benchmark- CNX Midcap which has generated returns at 16.6% CAGR over the similar timeframe.
. When assessed on the volatility front, JISCF has exposed its investor to moderate risk (as revealed by its Standard Deviation of 8.56%), but has been unsuccessful in clocking a luring risk-adjusted returns (as revealed by its Sharpe Ratio of 0.18 which looks average after considering the risk undertaken.); thus making it a moderate risk-average return investment proposition when compared to its peers.
Fund Manager Profile
| Name of the Fund Manager | Mr. Harshad Patwardhan | Mr. Amit Gadgil |
| Total Work Experience | Over 16 years | Over 8 years |
| Managing the fund since | Nov-07 | Feb-08 |
| Qualifications | B.Tech (IIT), MBA (IIM) and CFA | M.Com., ACA and PGDM (IIM-A) |
As seen above JPMorgan India Smaller Companies Fund`s performance is not very luring and thus nothing to vie for. The fund is middling on returns and has been unable to adequately compensate its investors. In terms of risk-adjusted returns, the fund is a moderate risk-average performer in the category.
Hence in our opinion, investors would be better-off avoiding JPMorgan India Smaller Companies Fund. It is noteworthy that decision of investing in a particular fund should not be taken only based on its 1 or 3 year performance. One should instead prefer the fund which shows consistency across market phases and qualifies based on other performance parameters too.
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