 "From Left: Pradip Shah, chairman, IndAsia Fund Advisors, Dinesh Kanabar, tax expert, G N Bajpai, chairman, Board of Trustees, NPS Trust and Vibhav Kapoor, chief investment officer, IL&FS")
The turnaround in the market can perhaps be best exemplified by the time it took the jury to pick out the winners this year. Deliberations lasted less than an hour, compared to around two hours last year. Clearly it is easier to pick the winners in a rising market, when fund managers are playing on the front foot rather than on the defensive, as they were last year.
The best performing equity fund manager this year outperformed his fund's benchmark by 14-21 percentage points, but it is not only the quantum of outperformance which was considered. A number of other criteria were used to pick the best of the lot.
To begin with, only open-ended diversified equity schemes were considered. Sector and thematic schemes, which have a limited mandate to only invest in the stocks of a certain section of the market, are excluded. The best performing funds are then identified amongst the diversified schemes. The fund manager is then ranked on the basis of the Sharpe ratio, which takes into account the returns generated by the fund in excess of the risk-free Treasury bill rate and the volatility that such returns are subject to. This 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.
These factors were all debated at length by the jury, headed by G N Bajpai, formerly 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 is the chief investment officer of IL&FS. He is one of India's foremost market experts. Leading tax expert Dinesh Kanabar, who has worked at senior positions with leading firms including KPMG and PwC, completed the four-member body.
The methodology for deciding on the best fund manager took into account a threshold limit for the fund size before deciding on the rankings, in keeping with the suggestion made by the jury in the past. The funds in the bottom 10 percentile in terms of quarterly average assets under management are excluded. The data examined was for the twelve month period ending on June 30, 2014, and was provided by ICRAOnline.
The period marks an interesting time for equity markets, marked by volatility in the first three months due to macro-economic concerns, and euphoria in the remaining part, based on prospects of a strong election mandate at the Centre. The Sensex was up 31.02 per cent during the period. It rose from 19,395.81 at the end of June 2013 to 25,413.78 by June this year. Since then, the market has repeatedly touched all-time highs on hopes from the new government. Interestingly, most mutual funds had outperformed their benchmarks during this period. Even,
U K Sinha, chairman of the Securities and Exchange Board of India, remarked at a public gathering on how nearly 85 per cent of the assets under management had outperformed their benchmark indices.
The criteria for the best fund manager included a requirement for the fund manager to have managed the fund for at least a year. Care is also taken to ensure that a fund manager does not win on the back of a single fund's performance. For this purpose, the rankings make use of an "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. After due deliberations it was decided that Prashant Jain had come out on top, delivering the best returns adjusted for the risk taken and the size of his funds. Jain is executive director and chief investment officer at HDFC Mutual Fund. He manages the HDFC Equity Fund and HDFC Top 200 Fund with assets of Rs 12,886.1 crore and Rs 11,657.4 crore, respectively.
G N Bajpai, the chairman of the four-member jury summed it up. "Credit will have to be given to Prashant Jain for managing more than Rs 11,000 crore per fund and still delivering safe returns."
Then the focus shifted to debt funds. For debt funds, ultra-short-term, liquid, floating rate fund, gilt-long term and gilt-short term schemes were excluded. These funds are relatively short-term, or provide little avenue for a fund manager to display skill in picking winning debt securities and securing the highest returns for investors without taking an inordinate amount of risk.
Skill was much in demand last year with debt fund managers having gone through a torrid time following the Reserve Bank of India's moves in July last year. At a time when the domestic financial world was hoping of rate cuts, the world currency markets saw significant volatility following US Fed's announcement of tapering its quantitative easing programme by the end of 2013.
India's central bank was then forced to tighten liquidity to curb excessive speculation in the rupee, as well as take measures to push up yields. Many banks and corporates had sought to make redemptions from debt mutual funds. This created liquidity issues at a number of fund houses. The central bank had even opened a special window to help mutual funds meet their liquidity requirements.
In such a scenario, the risk adjusted nature of the rankings was especially important. A fund which has a high return, but whose net asset value (NAV) is very volatile, would not figure too high on the list. Ultimately the best balance between returns and risk was struck by Sudhir Agrawal, the fund manager at UTI Mutual Fund and who manages the UTI Short Term Income Fund. The scheme had assets of Rs 2,895.89 crore.
Clearly, the 12-month period starting last June was tough for fund managers, more for the debt fund managers and to an extent for the equity fund managers.
The success of Prashant Jain and Sudhir Agrawal comes at a time when the industry itself has scaled fresh peaks. Mutual fund assets under management have touched an all-time high of Rs 10.58 lakh crore in the three-month period ending in September 2014.
