On September 27, 2007, the BSE Sensex had hit the 17000 level (on closing basis) for the first time. The index has been lingering thereabout even 5 years later in 2012 without any real movement. Grievous fall of the market for the reasons now known even to the most reluctant investor took the index to 8000 levels in March 2009. However dramatic recovery happened thereafter, rekindled the aspiration of wealth creation among investors but unfortunately it didn't last long as the range bound markets frustrated them over and over again. It was quite a crucial phase for mutual funds as they got no real support from the market which tested the fund management abilities of fund managers. Some funds have made their fortunes while others have lost their charisma. The total folios held by retail investors under all equity oriented schemes put together, in March 2012 were 9.4% lesser than the number of folios held by them in March 2009. Clearly the investors' interest is drying but their behaviour has remained more complex than one would imagine. In this article we have analysed how investors have responded to the performance of mutual funds and also have tried to answer the most commonly encountered question of how to deal with an underperforming mutual fund.
Report Card
|
6 Months |
1 Year |
2 Years |
3 Years |
5 Years |
| Total Number of Actively Managed Funds |
251 |
247 |
233 |
218 |
187 |
| Funds outperforming BSE 200 |
123 |
165 |
146 |
143 |
96 |
| Funds outperforming BSE 200 (%) |
49% |
67% |
63% |
66% |
51% |
| Funds outperforming Category Average |
121 |
123 |
131 |
114 |
93 |
| Funds Out performing Category Average (%) |
48% |
50% |
56% |
52% |
50% |
NAV Data as on June 29, 2012(Source: ACE MF, PersonalFN Research)
We analysed 251 actively managed funds with a minimum performance record of 6 months. However there were only 218 funds with a track record of more than 3 years. The number further reduced to 187 of funds with a track record of 5 years and above. The table above shows that the best performance from actively managed funds has come over the last 1 year as the percentage of funds outperforming BSE 200 was highest during this period. However, the striking difference in the number of funds outperforming the benchmark and the category average over a 3-Yr period shows that the top performers have far exceeded their peers and the benchmark index, taking the average returns higher. But subsequently only half of the funds have outperformed BSE 200 over last 5 years without any major deviation in the number of funds outperforming the benchmark and the category average which shows that there were a few outperformers. This brings out the fact that in the long term, only the consistent performers aid in generating wealth for its investors.
Since, now we know that there a few mutual funds which help generate wealth in the long term, it would be interesting to see how investors respond to the underperforming funds which are large in number and also in the degree of underperformance.
There can naturally be 4 responses when a fund underperforms.
- Investors stop investing in the fund and redeem their investments in search of better options.
- They buy better performing funds but they don't sell the current holdings anticipating one day their fund will catch up with the market
- Some investors may buy underperforming funds more aggressively thinking they would benefit from rupee cost averaging.
- The last natural response is they redeem underperforming funds and prefer to sit outside as they feel selecting a right mutual fund is too difficult a task.
Our analysis of actively managed funds shows that the response of investors has been mixed. Have a look at the table given below. The funds listed therein have seen their Assets under management (AUMs) eroding as their performance dropped below par.
Funds that have lost their Charisma
Change in AUM is calculated over 5 years (i.e. from March 2007- March 2012)
NAV Data as on June 29, 2012(Source: ACE MF, PersonalFN Research)
These funds were, once, popular with investors. Most of them were launched towards the end of the last bull cycle (2003-08). The New Fund Offers (NFOs) of these funds mopped up huge corpuses as investors believed that the bull-run is all set for a long haul. The best example of the NFO mania is Reliance Equity Fund, which collected Rs 5,790 Crore in its initial offer in June 2006. The fund has failed to generate positive returns over last 5 years. There have been relentless redemptions from the fund. The asset base of the fund has shrunk by massive 74% in last 5 years. The other funds appearing in the table also share similar stories of initial buzz getting fizzled owing to weaker performance.
Influential despite being the poor performers
Change in AUM is calculated over 5 years (i.e. from March 2007- March 2012)
NAV Data as on June 29, 2012(Source: ACE MF, PersonalFN Research)
Interestingly, there have been some funds which have managed to win confidence of investors despite being poor performers. For example, DSP BalckRock T.I.G.E.R. fund, which is a thematic fund, has not seen any significant redemption pressure despite underperforming BSE 200 with a noticeable margin over last 5 years. Dwelling deeper, we found out that DSP BlackRock T.I.G.E.R was the second best performing fund in the previous bull-run. During the last leg of the previous multi-year bull run ( August 1, 2005 - January 9, 2008), the fund had generated returns at the rate of 72.0% CAGR, far above the returns of 51.6% generated by BSE 200 over the same time period. Moreover, the fund had also beaten the category average returns of 49.1% CAGR. However, the performance of the fund started drifting since the beginning of the bear phase when it managed to outperform BSE 200 only marginally. In the recovery phase that started in March 2009 (and lasted till November 2010) the fund underperformed BSE 200 (which generated returns at 84.4% CAGR) by generating 73.0% CAGR returns. Investors have not been redeeming out of this fund hoping that the fund will start outpacing the broader markets someday as it routinely did in the previous bull market cycle. SBI Contra is one more such example which has managed to grow its corpus astonishingly thanks to its superior performance in the previous bull-run. The fund had managed to generate CAGR returns of 59.5% as against the 51.6% returns generated by BSE 200. Furthermore, the fund managed to beat the category average too with a noticeable margin.
The Funds that have come under the Lime Light
Change in AUM is calculated over 5 years (i.e. from March 2007- March 2012; except in case of IDFC Premier Equity fund where the change in AUM is calculated from November 2007- March 2012 for the reason of unavailability of data)
NAV Data as on June 29, 2012(Source: ACE MF, PersonalFN Research)
The funds that have become popular with the investors in last 5 years are either the top performers of the recent times or the steady performers across the market cycles. The sector and thematic funds have dominated the list of top performing funds over the last 5 years. Ironically, the bottom performers too are the sector and thematic funds. SBI Magnum FMCG fund has generated extraordinary returns to become the highest return generator. Though with Rs 71.4 crore under management, SBI FMCG is still a small fund; its AUM has grown at an exponential rate in last 5 years. The growth in AUM of HDFC top 200 suggests that the funds outperforming the benchmark index and the category average consistently (and across the market cycles) have been preferred by the investors. At present, HDFC Top 200 is the largest equity oriented fund in India. Reliance Banking is another example of how a sector fund can captivate investors with its eye-popping performance.
Our View
The memories of losses made in the bear market of 2008 are still not wiped off from the investors' mind. Due to stagnated markets and the deteriorating economic fundamentals; people have rather preferred to stay out of market than being invested for the long term. Those investing in sector funds are either astute investors who understand the economic cycles and business cycles well or they are the greedy investors following the heard to generate extraordinary returns in quick time. We believe that sector and thematic funds should be avoided as they invest in a concentrated portfolio of stocks belonging to a particular sector or a theme. These funds often exhibit extreme performances. When they outperform the broader markets; they outperform by a huge margin. But they fall like a pack of cards when the underlying sector is grappled with problems. Holding non performing sector funds would be a futile exercise as they may or may not return to their glory days. On the contrary you tend to lose the thriving opportunities present in other sectors and end up blocking your capital. Hence if at all, going against our belief, you invest in a sector fund you must be nimble enough to time your entry and exit.
In case of diversified funds too, giving undue weightage to the recent performance may be equally harmful and going by the star ratings may be hazardous if the rating is not the outcome of in depth and thorough analysis of mutual funds. There are several other parameters other than merely returns to gauge the performance of the fund. The prudent approach to determine how your fund is doing is to examine its performance against its benchmark and also the category peers. If it is outperforming the benchmark but the underperforming the category average then it may be an alarming bell for you. But, if it fails even to match the returns generated by its benchmark over relatively longer duration then it must be replaced with a close alternative.
We also believe that investors should follow their financial plans meticulously and invest in scheme that not only suit their risk profile but also have return generating potential needed to satisfy their goals. The portfolio rebalancing of mutual funds should not therefore be carried in isolation. However, it is undisputable that a consistently underperforming fund needs your attention but you need not respond by simply staying out of market. This may close doors for you to benefit from opportunities that may arise in the market.
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