Are big funds also the best?

Penny Wise

 The share of private players in the Indian mutual fund industry has been going up steadily. Prudential ICICI Mutual Fund is poised to overtake UTI Asset Management Company (UTI AMC) in terms of assets under management (AUM). Prudential ICICI has assets of Rs 12,637 crore as against UTI AMC's Rs 16,015 crore at the end of June 2003. Other private funds such as HDFC Mutual and Templeton are also catching up, with Rs 11,961 crore and Rs 11,152 crore respectively in AUM. Birla Sun Life Mutual Fund has Rs 7,307 crore in

 AUM, while Standard Chartered Asset management Company completes the top five with an AUM of Rs 5,991 crore. Are the big ones also the best in terms of performance? A look at the one-year category-wise returns indicates that it may not be the case across all categories.

 Take the case of the biggest private player of them all. Among balanced funds, Prudential ICICI's scheme is the best performer in its stable, but it ranks 24th in the full sample of 42 schemes, which meet our cut-off criteria.

 While the Prudential ICICI Balanced Fund posted a one-year return of 6.90 per cent, the best performing scheme in the category, HDFC Prudence Fund, posted relatively blistering returns of 29.97 per cent. Templeton's Franklin India Prudence Fund hasn't done badly either, ranking fifth with 15.66 per cent returns.

 Both Franklin Templeton and HDFC Mutual have another entry each in the top ten, with Templeton India Pension Scheme and HDFC Children's Gift Savings Plan returning 13.96 per cent and 13.20 per cent respectively. Among others, Birla Balance Fund ranks 14th with returns of 10.70 per cent.

 The top five seem to have done better in the equity-diversified category. HDFC Top 200 Fund ranks second in a sample of 70 in this category with a one-year return of 29.46 per cent, still way behind the 41.52 per cent from the category leader Reliance Vision Fund. Franklin India Prima Fund (28.32 per cent) and HDFC Equity Fund (20.65 per cent) are also in the top ten, while Franklin India Bluechip Fund (14.99 per cent), Franklin India Prima Plus (14.15 per cent), Templeton India Growth Fund (13.85 per cent) are ranked 11th, 12th and 13th. Prudential ICICI again fails to make much of an impact in this category with its top scheme, Prudential ICICI Growth Plan, ranking at 52, with 4.65 per cent returns.

 The pattern is repeated in the ELSS category. While HDFC MF again tops the sample with its Tax-Plan 2000 giving a one-year return of 30.49 per cent, Birla's Equity Plan and Taxplan 98 rank second and fourth with returns of 25.57 per cent and 24.49.

 HDFC Tax-Saver 96 (15.89 per cent), Franklin India Taxshield 98 (10.36 per cent) and Franklin India Taxshield 97 (10.14 per cent) also figure in the top ten. Prudential ICICI's best performing scheme in the category, Prudential ICICI Tax Plan, lags in comparison with returns of 8.10 per cent over the year.

 In the equity-index category, within the big five, Franklin Templeton's Franklin India Index Tax Fund (8.05 per cent) and Franklin India Index Fund (7.83 per cent) lead, but they are well behind the leader Nifty Junior BeES (26.66 per cent). Prudential ICICI Spice Fund makes it to the top ten with returns of 7.31 per cent, while its Index-Nifty Plan (4.70 per cent) has done better than HDFC Mutual's index scheme, HDFC Index Sensex Plus Plan (0.72 per cent).

 However, the top five have performed admirably well among gilt funds, with Templeton India Government Securities Fund coming out tops with an annual return of 24.87 per cent.

 This is still behind the leaders like FT India Gilt Investment Plan (27.40 per cent), IL&FS Gilt Fund-Long Term (26.98 per cent) and K Gilt (Serial) 2019 (26.39 per cent). Birla Gilt Plus - Regular Plan (23.90 per cent) and Birla Gilt Plus - PF Plan (22.75 per cent), HDFC Gilt Long Term Plan (22.25 per cent) and Prudential ICICI Gilt fund Investment Plan (21.76 per cent) also figure in the top ten in this category.

 Among income funds, Templeton India Income Builder Account (16.42 per cent) performed the best over a year, though still behind leader Escorts Income Bond which posted a whopping 80 per cent return. HDFC Income Fund (15.79 per cent), Prudential ICICI Income Plan-Long Term (16.18 per cent) and Birla Income Plus (15.79 per cent) are the others to have performed reasonably well.

 Among sector funds, Franklin Pharma Fund has performed the best on a quarterly basis with returns of 16.44 per cent. The fund's Franklin FMCG Fund gives a return of 2.17 per cent annually and 11.57 per cent for the quarter, while Prudential ICICI FMCG Fund has a quarterly return of 16.08 per cent. Birla MNC Fund has not done too badly either with an annual return of 5.56 per cent, and 14.67 per cent for the quarter.

 It can be surmised that overall the big private funds haven't achieved anything fantastic, though by the same token they haven't done too badly either.

 Methodology

 Mutual fund schemes are ranked on the basis of the weighted average of their 2-year and 1-year returns.Like in the previous years, the Business Standard Fund Manager seeks to rank schemes and also rate the best Fund Manager of the Year.

 The process of ranking starts with defining the universe of schemes. While we provide data on all schemes, we rank only those schemes which have been operating for at least two years and have a minimum corpus of Rs 40 crore. There is, therefore, a time and a corpus cut-off for ranking purpose only. The equity and debt schemes, which have been impacted by a change in management, the 12 months prior to June 30, 2003, have not been considered for the rankings.

 For rankings, the principle, followed in the earlier issues, is to use a time-weighted rate of returns based on the net asset values (NAVs). The rate of return is calculated on the NAVs on a point-to-point basis for two years and one year. The schemes then get ranked on the basis of a weighted average of their 2-year and 1-year returns.

 The weights assigned to the current year's return is 0.67, while the 2-year performance of the scheme gets a weight of 0.33. The higher weightage given to the current year's performance is justified on the basis that the Fund Manager essentially tracks the annual performance of schemes.

 The ranking is done separately for equity (diversified), equity (special focus), debt, gilt and balanced funds.

 The return-based ranking makes no attempt to compare the performance of schemes across these categories. The ranks thus assigned are strictly within the category of funds to which they belong. However, to arrive at the Fund Manager of the Year, we have to make an exception to the rule. It is erroneous to compare a debt scheme with an equity scheme on the basis of return alone. In order to compare them, there has to be some standardisation.

 Also, working on the well-accepted premise that fund management is not all about returns, we not only look at returns, but also the risks. What we have done is to calculate the risk-weighted returns across all schemes.

 An attempt has been made to estimate the return per unit of risk for the schemes. There is a small statistical issue which needs to be noted. Conventionally, at least 30 observations are needed to generate "statistically significant" results. However, we tried sensitivity of results to time period and found that the results are not sensitive.

 We continue to use the NAV-based rate of return over two years but go further and factor in the risks by calculating the "excess returns over benchmark" and accounting for volatility. This has been done by calculating the Sharpe ratio. The benchmark varies for different categories of funds.

 The benchmark for rating equity schemes is the Sensex, for debt schemes it is the return on risk-free paper and, for balanced schemes, it is 50:50 of sensex and risk-free return.

 Once all the schemes are rated, the fund manager whose funds have got the maximum ranks across all categories is declared the Fund Manager of the Year. Normally, there is only one chief investment officer (CIO) for a fund. However, in the case of the fund that emerges at the top in our risk-adjusted ratings, there are two CIOs_one managing debt funds, and the other equity funds.

 Since the overall performance of these funds has been determined taking an aggregate of the performance of both types, it was decided that the two will share the Fund Manager of the Year honour.