DSP BlackRock Investment Managers announced on Tuesday that it has decided to temporarily suspend all fresh transactions in its flagship small cap offering, DSP BlackRock Micro Cap Fund. Any subscriptions/switch-in/SIP/STP/DTP applications received post the cut-off timing of February 17, 2017 (tomorrow) will not be accepted by the Asset Management Company.
Per Aditi Kothari Desai, EVP and Head - Sales, Marketing & E-Business, DSP BlackRock, this move has been made in the interest of existing investors in the fund. "Having less than desired weightage in stocks that the fund invests in, can limit the fund's ability to generate returns in the future. Hence, we have taken a decision to stop accepting fresh investments - both via lumpsum and SIPs", she said. At close to 4,780 crores of AUM (as on 31st January 2017), DSPBR Micro Cap is nothing short of a small cap behemoth.
This isn't the first instance of an Asset Management Company taking a strategic decision to stop accepting fresh inflows into one or more of its schemes. IDFC Premier Equity Fund, Franklin Prima Fund, HSBC Midcap Fund and Reliance Growth Fund have suspended new applications into its schemes in the past.
Vinit Sambre, Senior Vice President and Fund Manager, DSP BlackRock stated that the fund's "current size poses the bigger challenge of liquidity"
Funds typically stop accepting fresh inflows due to capacity constraints, or a perceived lack of suitable investment opportunities in the sector, theme or market capitalization bracket that it is dedicated to. Sometimes, outperformance - combined with excessive inflows from investors - can cause a fund's AUM to swell to unwieldy levels. In such situations, fund managers become perforce constrained to stray from the fund's original mandate; for instance, a midcap fund could end up transmogrifying into a multi-cap fund, as fund managers broaden their investment base to keep up with fresh inflows and stay invested in equities.
Considering that an Asset Management Company's topline is linked directly to the quantum of assets managed by them, stopping fresh inflows into a fund is often considered - or positioned - as an altruistic move. However - reading between the lines, it might also be a signal of overvaluation within the particular sector or theme that the fund is dedicated to.
DSP BlackRock Micro Cap, for instance, invests predominantly into small cap stocks - though its mandate states that it needs to invest "at least 65 per cent of its portfolio in stocks outside of the top 300 companies by market cap". In the past, it has displayed a preference for cyclical stocks that will unlock value over the medium to long term. Does this move on their part imply that the number of value picks within the mid and small cap space is diminishing, as earnings growth struggles to keep pace with market prices? The PE (Price to Earnings Ratio) of the Nifty Midcap 50 is, after all, close to 32X current earnings as on date; even at the peak of the bull market that ended so unceremoniously in 2008, the PE ratio of the same index was closer to 25X. Have the fundamentals changed so drastically in the past 9 years as to warrant such a re-rating of the bellwether valuation indicator? I would think not.
A word of Advice for Investors: when AMC's start sacrificing their incomes by suspending inflows, it's time to question why. It would be prudent to exercise caution while investing lump sums of money into small or mid cap mutual funds or stocks at this point in the market cycle. Those sitting on sizeable profits in small and midcap funds may want to book out of them partially, and skew their equity portfolios towards large cap funds, balanced funds, or dynamic asset allocation funds. Those whose portfolios are unusually equity heavy and not in line with their risk tolerance levels may want to rebalance 50:50 across equities and accrual based debt funds at this stage. Those who have SIP's already running in small and midcap funds might want to rebalance the lump sums thus accumulated while keeping their SIP's running; a capitulation, if it were to come, could act as rocket fuel for your small and mid-cap SIP's in the long term. Either way, a little bit of caution at this stage wouldn't be a bad idea at all.
