Over-exposure to mid-caps and small-caps, feel analysts.
In spite of the euphoria surrounding equity markets and the rally led by optimism on global recovery, a number of equity schemes of mutual funds (MFs) have not just underperformed but also posted miniscule returns, as compared to their peers in the top quartile in the past year.
The funds in the equity diversified category have given returns in the range of 128-167 per cent, while these funds have posted returns in the range of 16-63 per cent.
Returns of these funds are nowhere close to their benchmarks, a parameter against which fund houses measure performance of their schemes. While the Sensex has delivered 98 per cent returns during the past one year, the bottom 10 funds have returns as low as 16 per cent.
| OUT OF SYNC In past 1 Year... | |
| Bottom 10 | Return (%) |
| Sahara Wealth Plus Fixed Pricing | 64 |
| Religare AGILE | 63 |
| JM Small & Mid-Cap Reg | 61 |
| Fortis Opportunities | 58 |
| HSBC Dynamic | 56 |
| Escorts Leading Sectors | 56 |
| JM Contra | 56 |
| Escorts High Yield Equity | 50 |
| DBS Chola Global Advantage | 43 |
| JM HI FI | 17 |
| (As on November 20, 2009) Source: Valueresearch | |
The main reason behind under-performance of these schemes is their over-exposure to mid-caps and small-caps during the past year. “Some of the schemes must have got badly hit in derivatives. It is obviously the stock selection that has not worked. It is possible that some of them might have been stuck with illiquid stocks and have not been able to exit them,” said an independent analyst.
For instance, JM’s Hi Fi fund has 10.13 per cent investment in equity derivatives. Mid cap stocks form 57.54 per cent of the fund’s portfolio, while 25 per cent of it is into small cap stocks, according to data available with Value Research. Similarly, in case of DBS Chola’s Global Advantage Fund, 38.93 per cent of the portfolio is skewed towards mid cap stocks and 25.81 per cent into small caps.
“The Fund’s investment objective is to invest in companies with export competitiveness and companies which are expanding in global markets. However, in the recent rally, domestic consumption stories have worked well, eroding returns for the fund.
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Export-oriented stocks have not been doing well since last year and one of the reasons is rupee appreciation. In the last one year, we have not seen opportunities as defined by the investment objective of this fund emerging in the market. Themes that have worked well are domestic-driven stories,” said Bajrang Bafna, Fund Manager, DBS Chola MF.
The category average for equity diversified funds in the three months ending on November 20 is 97 per cent. Major indices which these funds are benchmarked to have also delivered in the same region, with the BSE 200 returning 109 per cent and S&P CNX 500 returning 108 per cent. However, the returns posted by these funds are much below the category average, mainly due to their wrong stock strategies.
JM’s Hi Fi Fund actually posted a negative 5.36 per cent return for the three-month period ending October 31. Others which posted negative returns during the same period include DBS Chola Global Advantage, with minus 2.69 per cent, JM Nifty Plus with minus 2.01 per cent, LIC MF’s Opportunities Fund with minus 1.5 per cent and Taurus Bonanza Fund with minus 1.26 per cent.
In another example, JM’s Contra Fund, which is supposed to be investing in stocks using a contrarian strategy, has 8.84 per cent of the portfolio in equity derivatives. Contrarian investing refers to buying into fundamentally sound scrips which have under-performed or not performed to their full potential in their recent past. MF analysts feel that contra funds tend to perform well when the market goes down. In a rising market, performance of these funds generally remains muted.
Fortis Opportunities Fund, which follows an aggressive stock selection strategy, has been caught on the wrong foot, with its high exposure in defensives. It also had a high cash component at that time, which led to decline in returns.
Says Amit Nigam, Fund Manager, Fortis Opportunities Fund, “Some of the bets which were taken earlier did not work well. The fund was overly aggressive on real estate and had to bear the brunt of the huge correction. Also, the cash component was higher during January-February, when everybody was bearish on the market.
But the main reason behind under-performance is over-exposure to defensives, while high beta stocks have outperformed in the current rally.” Nigam has been managing this fund only since November this year.
Religare’s AGILE fund has posted returns of 63.12 per cent in the past year. “The problem with quaint models across the globe is that their returns tend to go down when there is higher volatility in the market. There was a spike in the volatility of Nifty during last year, which led to diminishing returns. However, volatility has been coming down since May and this fund has performed very well,” said Vetri Subramaniam, head of equity, Religare MF.