The mutual fund industry needs to pull up its socks, as a large number of schemes have underperformed their benchmark indices. According to the latest Standard & Poor’s Index versus Active Funds scorecard (produced in partnership with Crisil), a majority of actively-managed Indian MFs have underperformed their respective benchmarks over the past five years. The performance has been no better over a three-year or one-year period.
For long, the asset management industry has complained about funds’ performance being hit due to regular outflows. However, with the onset of tax-saving schemes, this excuse, too, seems to have been addressed, as these funds have a lock-in of three years. The study shows a majority of equity schemes across categories have underperformed the benchmark indices. What's surprising is that 65 per cent of large-cap equity funds failed to beat the S&P/CNX Nifty over the five years ending June 2011. This underperformance has continued into the latest 12-month period, with 60.6 per cent of large-cap funds giving lower returns.
Equity-linked saving schemes (ELSS) and gilt funds have also fallen behind their benchmarks over the past five years. In contrast, a majority of monthly income plans (MIP, hybrid) and debt funds (which invest mainly in corporate debt) have outperformed their benchmarks. In the case of ELSS, a majority of funds have underperformed the benchmark S&P CNX 500 over three-year and five-year time-frames. Explains Tarun Bhatia, director, capital markets, at Crisil: “The latest SPIVA scorecard for India highlights the challenges faced by active fund managers picking well-performing stocks in volatile market conditions.” Investors will now need to keenly track the performance of the fund manager as well as the size of the fund, as both will determine quality of returns.
Why & what
This trend seems to belie the common theory that equities offer better returns than most asset classes over the long term. So, what makes a majority of India’s equity-oriented MFs underperform?
For starters, there are too many schemes, and research shows MFs have got carried away over the past few years and launched schemes no different from existing ones. Analysis also shows that funds with a large AUM (assets under management) tend to do better than those with a relatively smaller asset base. The study shows that asset-weighted (where the size of assets is similar) returns were higher than equal-weighted (where large and small schemes are clubbed) ones across categories in longer time frames of three and five years (except in the case of gilt funds), indicating funds with larger assets under management performed better than smaller funds. Asset-weighted, large-cap equity funds have returned 14.6 per cent over the past five years, compared to 13.45 per cent for their equal-weighted equivalents.
One reason the industry cites fore underperformance of some schemes is divergence in the performance of stocks within the same sector. Over the past year, several sectors have seen leadership changes. The year 2010 is being dubbed one of dark horses. Explains Neelesh Surana, head of equities at Mirae Asset Management, “Over the past few years, there’s been significant stock-wise divergence in returns within the same sector. Sector leadership has changed, too. It’s not enough to pick the right sector but also the right stocks within a sector.”
For instance, over the last year, TCS has emerged as the bellwether for the information technology industry and today commands a premium over Infosys. Similarly, Bajaj Auto has beaten Hero Honda as a sector leader in the two-wheeler space.
However, Naren Sankaran, chief investment officer (equities) of ICICI Prudential MF, believes the environment shouldn’t be blamed for the underperformance of some funds. He says: “Funds that have a track record typically tend to attract maximum inflows. And, there would be different reasons for the underperformance of each fund. For instance, one of our mid-cap funds has underperformed and that’s because stock selection has hurt.”
