Top funds underperform benchmarks in 2017

Of the 11 funds that meet size criteria, seven didn't beat their benchmarks since beginning of 2017

Returns from mutual fund equity schemes have not kept pace with their respective benchmarks in 2017.

These schemes have an asset size of above Rs 10,000 crore each, with combined assets of Rs 1.7 lakh crore, nearly 30 per cent of the equity assets in the mutual fund industry.

Of the 11 funds that meet the size criteria, seven did not beat their benchmarks since the beginning of 2017. Of the four funds that outperformed, one beat its benchmark by 4.5 percentage points, while the other three beat theirs by 1-2 percentage points.

Seven of these funds were able to outperform their benchmarks year on year.

Experts said the underperformance could be due to a burgeoning of scheme size, an unexpected rally in certain segments like metals, public sector banks, and mid- and small caps.

"Several mid- and small-cap equity schemes have stopped taking fresh inflows. Earlier, fund managers could easily generate higher alpha returns by bringing in stocks from the mid- and small-cap space. But that is not the case any more," said Dhirendra Kumar, chief executive of fund tracking firm Value Research.

Alpha is the excess return of a fund relative to the return of its benchmark.

"The happening sectors of the past year were not dominantly present in fund managers' portfolios. This is the reason for the underperformance. Having said that, certain schemes tend to underperform when the markets rally and they come back strongly when the markets turn weak," Kumar added.

ICICI Prudential Value Discovery Fund, a Rs 17,306 crore scheme managed by Mrinal Singh, reported a year-to-date return of 11.9 per cent while its benchmark was up 17.3 per cent. Over the past year, the fund has returned 20.9 per cent against 26 per cent offered by its benchmark S&P BSE 500. Despite the short-term underperformance, the scheme has outperformed its benchmark in the 3-10 year horizon.

Similarly, the Rs 15,734-crore HDFC Mid-Cap Opportunities Fund, managed by Chirag Setalvad, underperformed its benchmark by over 3.5 percentage points at 22.2 per cent year-to-date. However, the scheme has had a stellar performance over the last five years, beating the benchmark by over 6 percentage points.

Experts said short-term performance should not be the barometer for judging equity schemes. The schemes' mandate and the fund managers' style of management also tend to impact performance.

"It is too short a period to judge schemes. Fund managers need to be given time as the current rally has been too fast. Fund managers tend to see value, quality and growth while picking stocks. And what we witnessed in the last couple of months is a sharp rally in certain pockets, which fund managers may have been avoiding," said Kaustubh Belapurkar, director, fund research, Morningstar India.

A chief investment officer at a leading fund house said, "There should be times when we must underperform. In a crazy run like the one we saw in recent months, had fund managers continued to outperform it would have sent an irrational message to the investing community. Schemes are fast tilting towards large-cap names as one cannot afford to continue with higher allocations to mid- and small-cap stocks."

Over the last year equity scheme bosses have been telling investors to tone down their expectations as years of outperformance may make way for a pause of a year or two.

"Fund managers needs to be right in picking large-cap stocks to generate alpha returns. But it is quite difficult to continue to be right on large-caps all the time," Kumar said.

Currently, the top holdings in fund managers' portfolios consist of HDFC Bank, ICICI Bank, Infosys, State Bank of India, Larsen & Toubro, ITC, Maruti Suzuki and IndusInd Bank, among others.