Canara Robeco Emerging Equities: 5 years of strong performance by this Mid and Small Cap Fund

There is a perception among some mutual fund investors that larger the fund AUM (assets under management), better is the prospect of good performance. However, in reality there is no significant correlation between fund AUM and relative outperformance of a fund. In fact, for small and midcap funds, large AUM base can negatively impact the fund performance. Canara Robeco Emerging Equities fund is a great example of a relatively small sized fund delivering outstanding performance. The fund has given nearly 40% annualized returns in the last 3 years, implying that a र 1 lac investment in the fund on August 20, 2012 would have grown to a whopping र 2.7 lacs in just three years. The last 2 years have been especially good for the midcap segment of our equity market. The CNX Midcap index doubled between August 20 2013 and August 20 2015. The chart below shows the daily prices of the CNX Midcap index over the past 2 years.

While the market has favoured the small and midcap segment in the last two years, the Canara Robeco Emerging Equities Fund has not only outperformed the benchmark CNX Midcap, but also most of its peers in the small and midcap mutual funds category (see the chart below for trailing annualized returns of the fund, the category and the benchmark).

Canara Robeco Emerging Equities Fund – Fund Overview

This fund is suitable for investors with high risk appetites, looking for high capital appreciation over a long term. However, investors should be prepared for high volatilities in the short term. Launched in 2005, the Canara Robeco Emerging Equities fund has an AUM base of र 655 crores with an expense ratio of 2.93%. The fund is managed by Ravi Gopalakrishnan and Krishna Sanghvi from year 2012 onwards. While the fund lagged behind its peers and the benchmark for the first few years, it has consistently outperformed the midcap funds category and the benchmark from 2009 onwards both in bull market and during market correction (see the chart below).

CRISIL ranks the Canara Robeco Emerging Equities fund 1 in the small and midcap funds category. Morningstar has a 4 star rating for this fund.

Portfolio Composition

The scheme seeks to generate long term capital appreciation by primarily investing in diversified mid cap stocks that have a potential to emerge as the bigger companies with higher performance. From a sector perspective, the portfolio has a pronounced bias towards cyclical sectors like Cement and Construction, Banking and Financial Services and Engineering. The portfolio is positioned to do well, when the capex cycle revives in the Indian economy. In terms of company concentration, the portfolio is very well diversified with its top 5 holdings, Indusind Bank, Britannia, Yes Bank, CCL Products and Ricoh India accounting for only 16% of the total portfolio value. Even the top 10 stock holdings account for only 23% of the total portfolio value.

Risk & Return

In terms of risk measures, the volatility of returns is on the higher side, relative to the midcap funds category as an average. Annualized standard deviations of monthly returns for three to ten year periods of the fund are in the range of 20% to 30%. On a risk adjusted basis, as measured by Sharpe Ratio, Canara Robeco Emerging Equities fund has however outperformed the category. Sharpe ratio is defined as the ratio of excess return (i.e. difference of return of the fund and risk free return from Government securities) and annualized standard deviation of returns. Higher the Sharpe ratio better is the risk adjusted performance of the fund. See the chart below, for the comparison of Sharpe ratio of the fund versus the mid-cap category.

Comparison with Peer Set

The chart below shows the comparison of the annualized trailing returns of the some of the best small and midcap funds over the last 10 years. Clearly Canara Robeco Emerging Equities Fund’s performance is right up there with its top performing peers.

Systematic Investment Plan Returns

The chart below shows returns as on August 19, 2015 of र 3,000 monthly SIP in the Canara Robeco Emerging Equities Fund Growth Plan, for respective years since inception (in March 2005). The SIP date has been assumed to first working day of the month.

The chart above shows that a monthly SIP of र 3000 in Canara Robeco Emerging Equities fund since inception, would have grown to nearly र 13.5 lacs, with a cumulative investment of only र 3.8 lacs.

Conclusion

The Canara Robeco Emerging Equities Fund has delivered over 10 years of strong performance. While the recent performance of the fund has been quite outstanding, its performance over the last 5 years or so has been consistently strong. Investors can consider buying the scheme through the systematic investment plan (SIP) route with a long time horizon. Investors should consult with their financial advisors if Canara Robeco Emerging Equities fund is suitable for their investment portfolio.