Picking the winners

An eminent jury spends the better part of an evening picking the Business Standard “Fund Managers of the Year”

After the market’s surge in May 2009 following the clear mandate to the Congress-led UPA government, the sentiments had clearly turned bullish. In fact, a lot of hope had already started reflecting in stock prices. At the same time, the global environment wasn’t good enough with early signs of economic recovery. In this backdrop it is not surprising that the broader markets moved sideways, waiting for further signs confirming a bull run. The S&P Nifty ranged 4,500-5,400 during August 2009 through July 2010, though it ended with a net gain of about 16 per cent.

While global uncertainties prevailed and the Indian economic growth was improving on the back of the support from the stimulus packages announced by the government, clearly, it wouldn’t have been easy for any fund manager to derive good returns in a range-bound equity market. Even on the debt side, interest rates (and bond yields) were on the rise, which impacted the market value of debt paper. For instance, the yield on 10-year government bonds moved up from about 7 per cent at the beginning of August 2009 to 7.82 per cent on July 30, 2010. However, the year saw high volatility in yields, which had scaled over 8 per cent around April. All this made it difficult for debt managers as well, to deliver good returns.

It was against this backdrop that a four member jury headed by Ravi Narain, managing director and CEO, National Stock Exchange and comprising Rajeev Gupta, managing director, Carlyle India Advisors, Ashvin Parekh, partner, national leader – global financial services, Ernst & Young and Vibhav Kapoor, group chief investment officer, IL&FS, met to pick the winners of the Business Standard Fund Managers of the Year.

The deliberations started off on the newly introduced concept of ‘Adjusted Sharpe ratio’, which is basically the weighted average Sharpe. While there is no doubt that Sharpe ratio, which measures the return for every unit of risk taken, is a better way to measure a fund manager’s performance rather than looking at absolute returns, the adjusted Sharpe ratio is a step forward.

The new concept was suggested last year by the distinguished jury, which was headed by Narain and comprised of Nainesh Jaisingh, managing director, Standard Chartered PE Advisory, Pradip Shah, chairman, IndAsia Fund Advisors and Joydeep Sengupta, managing director, McKinsey & Company. The idea was to check whether a fund manager performed equally well with all the schemes he/she managed.

The data was provided by ICRAOnline. A composite score was ascertained for each fund manager comprising of the weighted average of the Sharpe ratio achieved by each scheme managed by him/her. The average one year corpus (based on month-end figures disclosed by fund houses) of each scheme managed was used as weights to arrive at his score.

The two fund managers who walked away with the awards are Aniruddha Naha of DSP BlackRock for the excellent performance of the Micro Cap fund, and Amandeep Chopra and Manish Joshi of UTI Mutual Fund for the Floating Rate fund – STP. Notably, the adjusted Sharpe ratio achieved by the two schemes was visibly ahead of the second best funds in the respective categories, reflecting their superior risk-adjusted returns.

The process to pick the winners, however, was not quick and saw a healthy debate between members on various issues.

The members sought finer details on the calculations done as well as discussed the validity of taking assets under management (AUM or fund corpus) as the weight. Further investigation was done to ensure that the comparison is not across in-comparables.

After being convinced on the process and methodology, the members looked at the fund manager rankings in each of the categories, namely, equity and debt. To ensure that the ranking results were consistent and in the right direction, the details of the top and bottom five rankers were analysed, including details about individual funds managed by the fund managers like their AUMs, performance and so on. Even random checks were done. To be sure, they also called for the absolute returns. It was only then the members agreed on the winners in the two categories.

The size of the corpus that fund managers manage was seen as important criteria as it can help influence the fund performance. For instance, it is relatively easier to manage a small fund in the equity category, while a large corpus proves helpful in a debt fund. While some debate happened on whether a higher weightage should be given to size (AUMs), the members were unanimous on a minimum corpus for future rankings. To streamline the process further, they suggested that any fund with an AUM below 10 per cent of the category average should not be eligible for ranking in future.