Check out the small-cap favourites of star fund managers

The Indian stock market has oscillated to the tune of a faster-than-expected tapering signal from the US Federal Reserve and uncertainty arising out of the emergence of the new coronavirus strain Omicron. Benchmark indices have fallen 10% from the peaks in October and analysts expect another round of bearish activity in coming months.

Amid such a scenario, we have sought to identify a few potential candidates that have been vetted by market veterans.

One of the several ways one can mimic star fund managers is to look at their portfolio picks and replicate it at one’s end. But if those fund managers have been cutting or buying small lots of a stocks, one gets to know about them only after a lag and in that period the price movement could have made an entry unreasonable.

Secondly, one may end up with a portfolio having selection bias.

A fix for avoiding such a pitfall is to identify stocks of a category, say a market cap or sector or investment theme, and then further filter them down based on picks by multiple professional fund managers.

We do this exercise by picking a set of mutual funds in a category that have outperformed their peers comprehensively and have a group of common stocks.

In particular, we pick the small-cap space and identify small-cap mutual funds with a demonstrated history of five years and topping the charts in terms of returns.

In the small-cap space we get focused funds managed by SBI, Axis, Kotak and Nippon (formerly Reliance) that have all achieved annual returns of 25% or more.

Then we dived into their current portfolio to identify stocks that figure among the basket of at least three of the four funds to get a filtered list of vetted small-cap picks.

This exercise gives us names of six stocks: Blue Star, Carborundum Universal, Fine Organic Industries, Persistent Systems, Orient Electric and JK Cement.

Two of these are consumer-centric ventures—air-conditioner maker Blue Star and electrical appliance firm Orient. The others either operate into the industrial products or the technology sector.

If we drill further to pick small caps that figure among the basket of at least two of these star funds, we get additional names like Galaxy Surfactants, Grindwell Norton, KPIT Technologies, Narayana Hrudayalaya, Navin Fluorine International, Hawkins Cookers, Sheela Foam, Timken India, V-Guard, Cyient and Lux Industries.

Adding another filter on these stocks that have been topped up by one or more star fund managers in the recent past, we get five stocks—Blue Star, Galaxy Surfactants, Fine Organic, Cyient and V-Guard.