The world’s best-performing stock fund is discovering the downside of success.
After producing a three-year return of 275 percent, more than any other equity fund with at least $500 million, managers of the DSP BlackRock Micro Cap Fund say bargains are disappearing in their market niche of Indian small-caps. The dearth of cheap shares has become so severe that the fund took the unusual step of limiting client inflows as India’s benchmark small-cap index jumped to an all-time high this month.
The move, almost unheard of at a time when active managers around the world are struggling to prevent withdrawals, reflects growing apprehension toward one of the great investment stories of the past three years: India’s economic revival under Prime Minister Narendra Modi. While few dispute that smaller companies have benefited from the country’s world-beating growth, DSP BlackRock and other skeptics from Ativo Capital Management LLC to Auerbach Grayson & Co. say share prices have climbed too far, too fast.
“We are not comfortable with the current valuations, which is limiting our ability to build decent-sized positions,” Vinit Sambre, a co-manager of the Micro Cap fund at Mumbai-based DSP BlackRock, a JV between the world’s largest money manager and India’s DSP Group, said by e-mail. “Valuations discount much of the near-term positive developments.”
The Micro Cap fund, whose assets have expanded 11-fold over the past three years, began restricting daily inflows to 100,000 rupees ($1,491) per investor from Aug. 10, tightening the cap from 200,000 rupees in its second attempt to cool new subscriptions in two years. Aside from SBI Funds Management Ltd., which stopped sales of its small- and mid-cap fund in October, attempts to limit inflows by Indian money managers have been rare since the global financial crisis in 2008.
Investor demand has been especially strong for small-cap stocks in recent years as they outperformed every other major Indian asset class. The S&P BSE SmallCap index has jumped 121 percent since Modi was named the prime ministerial candidate of India’s Bharatiya Janata Party in September 2013, versus a 43 percent gain for the large-cap S&P BSE Sensex and a 42 percent increase in Bank of America Merrill Lynch’s gauge of Indian government bonds. Gold, a popular store of wealth in India, is up 2.6 percent in the period.