A study of 235 equity schemes that includes direct plans shows that 168, or 71 per cent, have underperformed their respective benchmarks, observed Value Research.
Market observers have attributed this to large sums chasing too few stocks, and the impact of regulatory changes such as categorisation of schemes as well as the introduction of total returns index, in lieu of a simple price index.
“Too much money chasing too few stocks has resulted in divergence of mutual fund portfolios from their respective benchmarks,” said Swarup Mohanty, CEO of Mirae Asset MF. “The introduction of total return index (TRI) has taken its toll as well.”
Benchmark indices have rallied on the back of the outperformance of a few select names, such as Tata Consultancy Services, Infosys, and Reliance Industries. Within the Nifty 100 universe, for instance, nearly 67 per cent of the stocks lag the index returns. “The last year has seen the emergence of a polarised market, with few stocks – even those that are richly valued – driving up the indices. Most equity schemes hold anywhere between 50-60 stocks, making it difficult to outperform benchmarks,” said Dhaval Kapadia, director, portfolio specialist, Morningstar Investment Adviser (India).
Categorisation of schemes and the introduction of TRI have also pulled down returns for some schemes. TRI may have shaved off 1-1.5 per cent (average annual dividend yield for Indian equities) from the returns of equity schemes. Notably, 26 per cent of the 235 schemes under consideration have underperformed their benchmarks by 1.5 per cent or less. Earlier, the net asset value (NAV) of MF schemes took into account dividends for computing returns. The schemes were, however, benchmarked against simple price-return indices that did not take into account the dividend component.
Experts believe some funds may have had to reallocate their portfolios because of categorisation, and were unable to focus on their investment objectives.
The Securities and Exchange Board of India (Sebi) had set out new norms for the classification of MF schemes in October last year, defining five broad categories for equity, debt and hybrid schemes. Active funds may see a turnaround over the next few quarters as corporate earnings improve, and more stocks start to outperform.
Large-cap schemes, however, may continue to find it difficult to generate alpha given the impact of TRI, said experts. “In the large cap space, the hurdle has gone up for fund managers to outperform the benchmark as the universe is limited to top 100 stocks by market capitalisation,” said G Pradeepkumar, CEO, Union MF.
According to a research note put out by Standard Chartered, the recent market correction from 2018 peak has created a greater valuation buffer, with valuations converging closer to longer term averages, compared to peak valuations a few months ago. “We believe a diversified exposure to equities makes sense in 2019. Both large-cap and mid-cap equities remain core holdings, given relative earnings and valuations are increasingly close to par.”