BS jury: Picking the winners

The process of choosing the Fund Manager of the Year in the equity category wasn't as tough as it was for the debt category given a tightly contested race

Unlike the previous years when large-caps were ruling the roost, the last 12-15 months have not been great going for blue chips. The S&P BSE Sensex for the 12-month period ending June 2016 eroded shareholder wealth as it fell 3.6 per cent. While the performance across market caps were volatile, falling in the first eight months of the period and registering a sharp recovery thereon, small and mid-caps outperformed their larger peers. For 12 months ending June 2016, the BSE mid and small-caps indices made investors richer by 5 and 8 per cent, respectively, as compared to the negative returns of the large-caps. The outperformance continued even after the market rally from the end of February. The Sensex fell 18 per cent from June last year to February this year while the small caps were down 15 per cent during this period.
 
It is not surprising then that the best performing equity fund manager was Vinit Sambre of DSP BlackRock Mutual Fund for his funds that invest in mid and small caps. The funds under management, which had a combined assets of nearly Rs 5,200 crore, outperformed benchmarks by 10 percentage points. The two funds Sambre manages are DSP BlackRock Micro Cap and DSP BlackRock Small and Midcap, of which the Micro Cap fund gave higher returns of 19.13 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 364-days Treasury bills and the volatility that such returns are subject to. The average one-year return for the 364-days Treasury bills was 7.41 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 Securities and Exchange Board of India (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, chairman of IndAsia Fund Advisors, who also helped in the founding of Housing Development Finance Corporation (HDFC) and the founder managing director of India’s first rating agency Crisil. Infrastructure Leasing & Financial Services director and group chief investment officer Vibhav Kapoor and former Punjab National Bank chairman and managing director and Centrum Capital director K R Kamath 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 average annual assets under management (AUM) were excluded. The data examined was for 12-month period ending on June 30, 2016, and was provided by Morningstar India.

The criteria for the best fund managers 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, and in relation to the category AUM. Thus, the jury looked at the risk-adjusted performance of the fund managers, adjusted for the size of the assets that they manage.

The jury summed up by saying that it was easy to arrive at the Equity Fund Manager of the Year given the clear outperformance of the DSP BlackRock schemes vis-à-vis their benchmarks as well as peers, on a risk-adjusted basis. In the debt schemes, given how the winds were blowing, the winner did well. However, the contest in the debt category was extremely tight with only a few basis points separating the winner on the absolute and relative performance in comparison to the benchmark as well as category returns.

For debt funds, ultra-short-term, liquid, floating rate, 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 initial part of the period under review, debt fund managers saw 10-year government security yield first decline only to rise again starting October 2015. The G-sec yields peaked in March and since then have been on the decline. Global events like the first rate hike (since 2008) by the US Federal Reserve in December 2015 as well as domestic events like credit issues at some Indian corporates (early 2016) took the markets by surprise. The flow of foreign funds into equity as well as debt markets were also quite uneven.

In such a scenario, the risk-adjusted nature of the rankings was especially important. The best balance between returns and risks in the debt category came from Anil Bamboli of HDFC Mutual Fund. In all, Bamboli managed three funds with average annual AUM of Rs 10,948 crore; the largest of the three funds, Bamboli managed called the HDFC Short Term Opportunities had a corpus of Rs 6,930 crore. The main outperformer vis-a-vis the benchmark was the HDFC Short Term Plan with a return of 9.6 per cent.