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The myth that size is a constraint for larger equity schemes when it comes to performance appears to have been busted. India is now home to more Rs 5,000-crore-plus asset size equity funds than ever before in the past.
Given the steep rally Indian stocks witnessed over the last one year, not only have these equity funds generated alpha (access returns against benchmarks) for investors but have also, in many cases, outperformed the category averages.
This may look surprising to those who had advocated strongly that increasing size of funds overshadows performance, but it’s true. Though there have been tough times for larger funds during the period 2011-2013, but sheer conviction of fund managers in their stock picks and their decisiveness of not falling prey to churning of portfolios, finally, has resulted in unexpectedly higher returns.
Anand Radhakrishnan, the chief investment officer (CIO) of Franklin Templeton Asset Management (India), said: “The investment strategy of our Bluechip Fund has remained the same through market cycles since inception. Our belief is that there are stocks that need to be bought and sold regardless of the state of markets and hence, there has been no change in our investment strategy. We continue to hold on to stocks that fall out of favor if we believe that the fundamentals are still strong. Though growth stocks form a large component of our portfolio, we have also tried to capitalize on emerging opportunities in value stocks."
Prashant Jain, the CIO of HDFC Mutual Fund — one of the fewest fund managers in India witness to several cycles over the last two decade, in particular, was under scrutiny as his schemes had failed to deliver in the last few years. Till a year-and-a-half back, experts were linking his schemes’ underperformance with the rising asset size. Jain never agreed with this view and remained stuck with his hand-picked stocks.
Now, as things stand, HDFC Equity and HDFC Top 200 — with a whopping size of nearly Rs 31,000 crore, when put together - have not only gained in size at a faster pace but also have emerged among the top out-performers - not doing only better than benchmarks but beating category averages with a huge margin as well.
Niranjan Risbood, director (fund research) at Morningstar India, said: “If you look at India’s two largest funds — HDFC Equity and HDFC Top 200, they are just around 0.25-0.35 per cent of the Indian market cap. It's not a substantial number in terms of market cap of India. So, from that perspective I do not think that size is a constraint from the large-cap side. From the mid-cap side it can be a problem because beyond a certain size it's difficult to maintain the mid-cap character of that fund.”
“There have been many who have repeatedly suggested that large mutual fund schemes are constrained by size and underperform their smaller counterparts. I believe that size is not and can never be a constraining factor for performance. It’s true that our schemes are large but they are large compared to other schemes of the sector. The industry’s all equity schemes put together make only 2-2.5 per cent of India's total market cap. We are very small relative to the market,” said Jain.
Large schemes from the stable of other fund houses too have done quite well. Reliance Equity Opportunities Fund, India's third largest equity scheme, generated a one year return of 71 per cent while that of the benchmark stood at 39 per cent. Similarly, ICICI Prudential Value Discovery Fund gave investors a return of 82 per cent whereas its benchmark could return only 60 per cent over the last one year. (See table)
Thanks to the strong rally in the first half of the current financial year that India has now 11 equity schemes with a size of Rs 5,000 crore and more. The number stood at a mere four in March, 2014. Interesting fact is that schemes of Franklin Templeton, Birla Sun Life and IDFC too have joined the Rs 5,000 crore club.
According to Jain, the percentage of AUM outperforming their benchmarks is significantly higher than percentage of schemes outperforming their benchmarks. “This implies that larger schemes have done better compared to their smaller peers,” he added.
