'I am a perennial bull on small and mid caps'

R Srinivasan, CIO - Equity at SBI Mutual Fund and the chief architect of SBI Small Cap Fund's dream run, is an interviewer's dream. Unlike many folks in the industry, he is comfortable tackling the most unpleasant of questions. There's also the fact that he is one of the few fund managers in the industry who has made his name by using the bottom-up approach to choosing stocks (a style of stock selection that focuses more on the company stock and less on market cycles). "I am not much of a macro expert," he tells us matter-of-factly. This streak of honesty carries through the rest of the conversation as he talks about his stock holdings, market valuations and the small-cap universe.

- R SRINIVASAN

The small-cap space was lousy this year. BSE 250 SmallCap fell twice as much as Sensex during the first half of 2022, which is quite usual in declining market phases. However, when the market tides turned later, its participation in the recovery was very minimal. What's your view? 

It was inevitable. Despite the 2022 underperformance in the small-cap index, it has still delivered a CAGR of almost 30 percent in the last three years, which is phenomenal. If it doesn't perform for another year, say, that's just reversion to the mean. I wouldn't be too worried about it.

One needs to remember why small caps are always attractive. If you do a normal distribution of returns, I reckon that the small-cap curve will be fatter. That means you'll have a lot of losers and you'll have winners with a high dispersion of returns between them. This is what gives an opportunity for a fund manager to generate alpha. But, of course, the risk is also higher.

Despite the view on the category, I am like a perennial bull on small and mid caps. But note that we don't even look at 70 percent or more of the small caps out there. Given that the small- and-mid-cap universe itself is 10 times that of large caps, the probability of you buying a small- or mid-cap stock in a cap-agnostic portfolio is much higher, even if not as much. There is also the benefit of spotting under-researched stocks. You don't even have to be too smart; you just need to spend that time to research the stock.

SBI Small Cap Fund is now the second biggest in the category despite limits on SIP instalment and suspension on lump-sum investing. Do liquidity concerns or potential shrinking of the investable universe worry you?