A year since mkt high, 80% active largecap funds struggle to top benchmarks

The trend is completely the opposite with smallcaps, with 80% schemes surpassing their benchmarks

About 80 per cent of actively-managed large-cap mutual fund (MF) schemes have struggled to transcend returns generated by their benchmark index over the past year.

The Nifty and the Sensex — widely used benchmarks by large-cap-oriented schemes — touched their lifetime highs in October 2021. Since then, they have been on a wild ride amid unwinding of post-pandemic stimulus measures by global central banks.

In the past year, the benchmark Nifty has moved in a 21-per cent band, logging its lifetime high of 18,477 on October 18 and a low of 15,294 on June 17.

“One year is too short a time frame to assess a fund manager’s performance. Such a period of intense volatility happens when the mettle of active funds or their managers gets tested. By that yardstick, large-cap fund managers haven’t had an easy ride if one-year performance is anything to go by,” said a senior fund manager.

Not all large-caps have fared badly.

There is a huge gap between returns generated by the best-performing schemes and the stragglers in these categories.

For instance, the top-performing scheme in the large-cap category has generated 8.3 per cent one-year return, even as the benchmark is declining 0.3 per cent. The weakest link, on the other hand, has given negative returns of 6.6 per cent.

The picture is different in the case of active small-cap schemes, with 88 per cent managing to generate benchmark-beating returns. Meanwhile, about 70 per cent active multi-cap and mid-cap funds also managed to overcome their benchmarks.

Market observers say the large-cap space is where the interest of large institutional players, including foreign portfolio investors, is concentrated. As a result, there is little information asymmetry or the possibility of making outsized gains vis-à-vis mid-caps.

The trend of large-cap schemes struggling to generate benchmark-shellacking returns isn’t new.

According to the S&P’s SPIVA report, 82 per cent of active large-cap schemes underperformed the benchmark over a five-year period ended December 31, 2021.

This trend has led to an increase in the popularity of exchange-traded funds (ETFs) and index funds. In the past year, the average assets under management (AUM) of index funds and ETFs has jumped 37 per cent to nearly Rs 6 trillion, notwithstanding the diminutive mark-to-market gains.

When it comes to beating index returns, thematic or sectoral funds have done relatively better. For instance, all schemes focused on the ‘consumption’ and ‘dividend yield’ themes managed to outstrip their benchmarks.

Among sectoral funds, consumption, infrastructure, and public sector undertakings (PSUs) have been outperformers.

Consumption was the only category where the average returns were in double digits (at 20 per cent). Infrastructure funds delivered 8.3 per cent returns on average, followed by PSU funds (7.9 per cent).

On the other hand, information technology funds took the biggest hit during the one-year period ended September this year. Their average returns stood at a negative 16 per cent.

Asset management companies (AMCs) have also been putting effort into popularising passive funds. They launched 83 index funds and ETFs in 2021-22 and 31 schemes in 2022-23. The efforts have resulted in doubling the share of passive funds in the total assets under management (AUM) of top 10 fund houses. Passive funds now account for 14 per cent of the total AUM of these fund houses, compared with just 7 per cent three years ago.

Markets regulator Securities and Exchange Board of India (Sebi) is also keen to ensure the success of these low-cost schemes.

In May, Sebi released a circular on the development of passive funds. The circular brought in many new norms to address the issues plaguing ETFs like the introduction of market-making framework and setting a Rs 25-crore threshold for direct ETF transactions with AMCs to improve the liquidity of ETFs on exchanges.