NFO analysis: ITI Small-Cap Fund

ITI Asset Management Company (AMC) had launched its ITI Balanced Advantage Fund last month. Even after completing one year in this space, ITI AMC is relatively new which launched its first fund in April 2019. They started off with launching their liquid fund followed by a multi-cap fund that was launch in May 2019. They went further and launched four different funds viz. arbitrage fund, Equity-Linked Saving Scheme (ELSS), overnight fund and now came up with a New Fund Offer (NFO) for small-cap fund which is named as ITI Small-Cap Fund. The latter is an open-ended fund that predominantly invests in small-cap stocks, open for subscription up to February 10, 2020. The scheme would reopen for continuous sale and repurchase on or before February 24, 2020.

Objective:
The investment objective of this scheme is to seek capital appreciation by predominantly investing in equity and equity-related instruments of small-cap companies. Having said that, it provides no assurance or guarantee that the investment objective would be achieved at all times.

Asset Allocation:

** Investment universe of small-cap: The investment universe of ‘small-cap’ shall comprise companies as defined by SEBI from time to time.

Benchmark:
The performance of the scheme will be benchmarked against the Total Return Index (TRI) of Nifty Small-Cap 100. Most of the schemes in this category are benchmarked against Nifty Small-Cap TRI followed by S&P BSE Small-Cap TRI. Besides, there are only eight out of 22 schemes, which have the same benchmark index as ITI Small-Cap Fund. So, they would become true peers. The trailing returns over five years of Nifty Small-Cap TRI are 3.84 per cent whereas that of S&P BSE Small-Cap TRI is 5.56 per cent. Moreover, the category average of five-year trailing return stands at 7.93 per cent.

Investment Strategy:
The scheme is said to follow a predominantly small-cap strategy with a minimum exposure of 65 per cent to small-cap stocks. The fund may also participate in other equity and equity-related securities to construct an optimal portfolio.

The scheme will follow a bottom-up stock selection process to build its portfolio, with a focus on appreciation potential of individual stocks from a fundamental perspective. It is said to bet on small-cap stocks that meets the margin of Safety, Quality of the business & low Leverage (SQL) investment philosophy, has good corporate governance, trading at cyclical bottoms, they pertain to emerging sectors, are beneficiaries of the formalisation of the economy and to whom government policies would favour.

It is also certain that the fund might invest some portion of its corpus in debt and money market securities.

Fund Manager:
This scheme will be co-managed by George Heber Joseph and Pradeep Gokhale. Prior to associating with ITI AMC, George Heber Joseph was associated with the fund management team of ICICI Prudential AMC from 2008 to 2018.

During that period, he managed funds like ICICI Prudential Multi-Cap Fund, ICICI Prudential Long-Term Equity Fund – Tax Saving, ICICI Prudential Child Care Gift Plan and also some of the close-ended funds as well. If we look at the performance of the said funds in the period, he was associated with ICICI Prudential AMC then, ICICI Prudential Multi-Cap Fund-giving 7.83 per cent, ICICI Prudential Long-Term Equity Fund (tax saving)-9.58 per cent and ICICI Prudential Child Care Fund-giving 6.31 per cent of returns.

This fund would also be co-managed by Pradeep Gokhale, who prior to joining ITI AMC was associated with Tata AMC from 2004 to 2018. While he was associated with Tata AMC, he managed funds like Tata Large-Cap fund, Tata Large and Mid-Cap fund, Tata India Offshore Opportunities Fund and Tata Ethical fund. If we look at the performance of these funds, during his tenure with Tata AMC then, Tata Large-Cap fund gave 16.32 per cent, Tata Large and Mid-Cap fund gave 16.48 per cent and Tata Ethical Fund gave 16.84 per cent returns.

Also, George Heber Joseph co-managed other ITI funds viz. ITI Liquid Fund, ITI Multi-Cap Fund, ITI Long-Term Equity Fund, ITI Arbitrage Fund, ITI Overnight Fund and ITI Balanced Advantage Fund. Even Pradeep Gokhale co-manages the funds of ITI viz. ITI Multi-Cap Fund, ITI Long-Term Equity Fund and ITI Balanced Advantage Fund.

Our Recommendation
There’s no doubt that both the fund managers are capable and have extensive experience in managing equity mutual fund. Even the small-cap category is expected to do well this year. However, ITI Mutual Fund is relatively a new fund house. So, it is always better to wait and watch as to how the fund’s investment philosophy turns out. Also, being an NFO, it would be interesting to see how much time it takes to deploy the funds. Ideally, they should not be taking much time to deploy, as there might be various stocks available at attractive valuations. Having said that, if you are someone who is particularly looking a fund for long-term growth and expect to get higher returns as well as have an aggressive risk profile then, you can subscribe to this fund.

Although we believe that you should invest in a fund which has at least been through two market cycles. Also, before investing in any fund, you should check if it suits you in terms of your risk and returns. For someone who is an aggressive risk taker, believes that he needs a small-cap fund for achieving long-term financial goals which are due to be ten-plus years from today then, there are other funds in the same category with a longer history to analyse and choose from.