 "Picking the winners")
Most of us would like to believe that after the strong gains of over 40 per cent by the S&P BSE Sensex during the 12 months ending June 30, 2015 and interest rate cuts by the Reserve Bank of India (RBI), it would have been an easy task for the Jury to pick the winners.
Not really! For one, majority of equity mutual funds had outperformed their benchmarks during this period, while after initial rate cuts the RBI disappointed debt markets by taking a pause.
The Jury deliberated for nearly an hour and a half to pick out the winners this year.
However, the quantum of outperformance was not the only criteria, but other parameters including standard deviation, risk-adjusted returns as well as quality aspects like portfolio diversification and concentration of investments were applied to pick the best of the lot, both for equity as well as debt.
In the equity space, only open-ended diversified equity schemes were considered. Sector and thematic schemes, which typically invest only in stocks of a certain section of the market, are excluded. The rankings for both equity and debt are on the basis of the Sharpe ratio, which takes into account returns generated by the fund in excess of the risk-free 91-days Treasury bills and the volatility that such returns are subject to. The average one-year return for the 91-days Treasury bills was 8.27 per cent for the period under review. This process would help identify the fund manager who has helped generate the highest amount of returns, adjusted for the risk he has taken to generate those returns.
All these factors were debated at length by the jury, headed by G N Bajpai, former chairman of Sebi as well as the Life Insurance Corporation of India (LIC). He is currently the chairman of the Board of Trustees of the NPS Trust. It also included Pradip Shah, the chairman of IndAsia Fund Advisors. He has helped in the founding of Housing Development Finance Corporation (HDFC) and of rating agency Crisil. Vibhav Kapoor, director & group chief investment officer of IL&FS and one of India's foremost market experts along with tax expert and managing partner of APAS LLP, Ashvin Parekh, who has worked at senior positions with leading firms including EY, completed the four-member body.
The methodology also took into account a threshold limit for the fund size, whereby the funds in the bottom 10 percentile in terms of quarterly average assets under management (QAAUM) were excluded. The data examined was for the twelve month period ending on June 30, 2015, and was provided by ICRAOnline.
The criteria for the best fund manager included a requirement for the fund manager to have managed the fund for at least a year. To ensure that a fund manager does not win on the back of a single fund's performance, the rankings were done on the basis of "Adjusted Sharpe Ratio". The score is based on the weighted average of the Sharpe ratio achieved by each scheme managed by the person. Thus, the jury looked at the risk-adjusted performance of the fund managers, adjusted for the size of the assets that they manage.
G N Bajpai, the chairman of the four-member jury summed it up by saying, "To pick the winners we have tried to find more and more objectivity into the selection process and that's why among other parameters we also looked at the corpus of the fund managers instead of just the industry (category) so as to look at the (adjusted) Sharpe Ratio from a different angle. The whole idea was to make sure that not only quantitatively but qualitatively also the assessment is perfect," said Bajpai.
For debt funds, ultra-short-term, liquid, floating rate fund, gilt-long term and gilt-short term schemes were excluded since these funds are relatively short-term, or provide little avenue for a fund manager to display skill in picking winning strategies and securing the highest returns for investors without taking an inordinate amount of risk.
In this category though, in the latter part of the period under review, debt fund managers had seen tough times given the fluctuations in bond yields and risk aversion thanks to global events. While in 2013 it was the US Fed's announcement of tapering of its quantitative easing programme that took global markets by surprise, in 2014-15 worries over the Fed's first rate hike since 2008 took toll.
Thus, despite falling inflation, market experts say the rate cuts by the RBI have been lesser that expected. The stress in various sectors also made it difficult for debt fund managers.
In such a scenario, the risk-adjusted nature of the rankings was especially important. The best balance between returns and risks was struck by Santosh Kamath and Kunal Agrawal of Franklin Templeton Investments, India. In all, Kamath managed four funds with average QAAUM of Rs 26,355 crore; Agrawal jointly managed the Franklin India STIP fund that did very well and had the largest corpus of Rs 11,219 crore.
The success of the equity and debt fund managers comes at a time when the industry itself has scaled new peaks even as equity and debt markets were faced with different circumstances. As on June 30, 2015, mutual funds total assets under management stood at Rs 11,73,294 crore.
Not really! For one, majority of equity mutual funds had outperformed their benchmarks during this period, while after initial rate cuts the RBI disappointed debt markets by taking a pause.
The Jury deliberated for nearly an hour and a half to pick out the winners this year.
Also Read
The best performing equity fund managers were R Janakiraman and Roshi Jain of Franklin Templeton Investments, India. The funds under their management, which had a combined AUM of nearly Rs 16,500 crore, outperformed their benchmarks by 12-25 percentage points. In all, there were six funds that Janakiraman managed; Jain was joint manager in four of these including Franklin India High Growth Companies Fund that delivered the highest return for them at 36 per cent.
However, the quantum of outperformance was not the only criteria, but other parameters including standard deviation, risk-adjusted returns as well as quality aspects like portfolio diversification and concentration of investments were applied to pick the best of the lot, both for equity as well as debt.
In the equity space, only open-ended diversified equity schemes were considered. Sector and thematic schemes, which typically invest only in stocks of a certain section of the market, are excluded. The rankings for both equity and debt are on the basis of the Sharpe ratio, which takes into account returns generated by the fund in excess of the risk-free 91-days Treasury bills and the volatility that such returns are subject to. The average one-year return for the 91-days Treasury bills was 8.27 per cent for the period under review. This process would help identify the fund manager who has helped generate the highest amount of returns, adjusted for the risk he has taken to generate those returns.
All these factors were debated at length by the jury, headed by G N Bajpai, former chairman of Sebi as well as the Life Insurance Corporation of India (LIC). He is currently the chairman of the Board of Trustees of the NPS Trust. It also included Pradip Shah, the chairman of IndAsia Fund Advisors. He has helped in the founding of Housing Development Finance Corporation (HDFC) and of rating agency Crisil. Vibhav Kapoor, director & group chief investment officer of IL&FS and one of India's foremost market experts along with tax expert and managing partner of APAS LLP, Ashvin Parekh, who has worked at senior positions with leading firms including EY, completed the four-member body.
The methodology also took into account a threshold limit for the fund size, whereby the funds in the bottom 10 percentile in terms of quarterly average assets under management (QAAUM) were excluded. The data examined was for the twelve month period ending on June 30, 2015, and was provided by ICRAOnline.
The criteria for the best fund manager included a requirement for the fund manager to have managed the fund for at least a year. To ensure that a fund manager does not win on the back of a single fund's performance, the rankings were done on the basis of "Adjusted Sharpe Ratio". The score is based on the weighted average of the Sharpe ratio achieved by each scheme managed by the person. Thus, the jury looked at the risk-adjusted performance of the fund managers, adjusted for the size of the assets that they manage.
G N Bajpai, the chairman of the four-member jury summed it up by saying, "To pick the winners we have tried to find more and more objectivity into the selection process and that's why among other parameters we also looked at the corpus of the fund managers instead of just the industry (category) so as to look at the (adjusted) Sharpe Ratio from a different angle. The whole idea was to make sure that not only quantitatively but qualitatively also the assessment is perfect," said Bajpai.
For debt funds, ultra-short-term, liquid, floating rate fund, gilt-long term and gilt-short term schemes were excluded since these funds are relatively short-term, or provide little avenue for a fund manager to display skill in picking winning strategies and securing the highest returns for investors without taking an inordinate amount of risk.
In this category though, in the latter part of the period under review, debt fund managers had seen tough times given the fluctuations in bond yields and risk aversion thanks to global events. While in 2013 it was the US Fed's announcement of tapering of its quantitative easing programme that took global markets by surprise, in 2014-15 worries over the Fed's first rate hike since 2008 took toll.
Thus, despite falling inflation, market experts say the rate cuts by the RBI have been lesser that expected. The stress in various sectors also made it difficult for debt fund managers.
In such a scenario, the risk-adjusted nature of the rankings was especially important. The best balance between returns and risks was struck by Santosh Kamath and Kunal Agrawal of Franklin Templeton Investments, India. In all, Kamath managed four funds with average QAAUM of Rs 26,355 crore; Agrawal jointly managed the Franklin India STIP fund that did very well and had the largest corpus of Rs 11,219 crore.
The success of the equity and debt fund managers comes at a time when the industry itself has scaled new peaks even as equity and debt markets were faced with different circumstances. As on June 30, 2015, mutual funds total assets under management stood at Rs 11,73,294 crore.