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If you ask us which is by far the single biggest disruption in MF industry – it’s the birth of ETFs and Index Funds or as we call them, passive strategies!
The day is not far when there shall be an Index fund for every asset class and it shall be virtually free to own it. We are reminded of this famous quote from Vito J. Racanelli – “Think of index funds as the market’s version of a wolf pack picking off and weeding out the slower and weaker active fund managers in the herd, those with consistently poor returns and high fees.”
Lets begin the countdown…!
In our constant quest for seeking Alpha in the Indian Mutual fund industry – we are yet again drawn towards comparing Active strategies with Passive funds.
Well, to all those who have missed our previous note on similar lines, here’s the link: 112 day – Equity Roller Coaster
This time, we expand our horizon from 112 days – which was essentially the time market fell. We are now synthesizing data from 31st Jan to 23rd Oct – a period of 266 days.
Why these 266 days? Simply because in this time frame markets traversed an entire V-shaped recovery. So Sensex after falling from a level of 40723 came back almost to similar levels and so did Nifty from a level of 11962 seen on 31st Jan.
| Indices | 31-01-2020 | 23-10-2020 | Return |
| Sensex | 40723 | 40685 | -0.09% |
| Nifty | 11962 | 11930 | -0.27% |
| Bank Nifty | 30833 | 24478 | -20.61% |
| Nifty Midcap 150 | 6661 | 6568 | -1.40% |
| Nifty Smallcap 250 | 5200 | 5104 | -1.85% |
We also list below performance of various index funds in this same period. Almost all index funds are reflecting the index returns (+/-1%). Nifty 50, Nifty 500, Nifty Midcap 150 and Nifty Smallcap 250 are all flat in this time period. Barring Bank Nifty Index fund which is down 20% in line with the Bank Nifty.
| Index Funds | |||
| Scheme | 31-01-2020 | 23-10-2020 | % Change |
| HDFC Index Fund-Sensex(G) | 366.84 | 368.95 | 0.6% |
| Nippon India Index Fund – Sensex Plan(G) | 20.76 | 20.96 | 0.96% |
| ICICI Pru Nifty Index Fund(G) | 119.32 | 119.64 | 0.3% |
| Tata Index Fund-Nifty Plan(G) | 76.92 | 77.16 | 0.3% |
| Motilal Oswal Nifty Bank Index Fund(G)-Direct Plan | 11.25 | 8.93 | -20.6% |
| Motilal Oswal Nifty 500 Fund(G)-Direct Plan | 11.05 | 11.03 | -0.2% |
| MOSL Nifty Midcap 150 Index Fund(G)-Direct Plan | 11.64 | 11.69 | 0.4% |
| MOSL Nifty Smallcap 250 Index Fund(G)-Direct Plan | 11.48 | 11.4 | -0.7% |
Now, lets quickly take a look at the active universe across categories:
- Large Caps: This is one category where we have been unequivocally advocating Index funds as suitable replacement. Schemes across the category continue to disappoint when it comes to alpha generation or beating the benchmarks. While the index funds are just about positive in the 266 day period, moost of the active large cap funds are flat to mildly positive and few are negative also. Barring one exception of IDFC Large Cap fund which is up 4% (and no one could have predicted this name in Jan !), no other fund has significantly outperformed the index. Well this isn’t the comprehensive universe – but moot point is that in large cap category its become extremely difficult for schemes to consistently outperform the index with a reasonable margin (key word here is “consistently”) owing to few factors:
- the ballooning size of schemes,
- restrictions on stock selection (80% from Top 100 names by Market Cap) and
- the benchmark against TRI (total return index) indices which includes dividend yield of Index,
And in such a scenario, it becomes very difficult for one to pick which large cap scheme will be the winner in next quarter or half year. And this rotation is extremely dynamic and hugely fluctuating every quarter. Hence, in our view it is better one avoids that guess work for an additional 0.5-1% which also is not sustainable.
| Large Cap | |||
| Scheme | 31-01-2020 | 23-10-2020 | % Change |
| Aditya Birla SL Frontline Equity Fund(G)-Direct Plan | 246.14 | 241.38 | -1.9% |
| Axis Bluechip Fund(G)-Direct Plan | 35.02 | 35.25 | 0.7% |
| HDFC Top 100 Fund(G)-Direct Plan | 509.31 | 469.54 | -7.8% |
| ICICI Pru Bluechip Fund(G)-Direct Plan | 46.73 | 45.86 | -1.9% |
| IDFC Large Cap Fund(G)-Direct Plan | 36.83 | 38.39 | 4.2% |
| Mirae Large Cap Fund(G)-Direct Plan | 57.13 | 57.91 | 1.4% |
| Kotak Bluechip Fund(G)-Direct Plan | 272 | 275.64 | 1.3% |
| Nippon India Large Cap Fund(G)-Direct Plan | 37.63 | 33.58 | -10.8% |
- Large & Mid Cap Category / Multi Cap Category / Focussed Category
The reason why we chose all kind of index funds above was to tell our readers that mostly Nifty50, Nifty 500, Nifty Midcap150 and Smallcap 250, were all flat in this time frame. So no matter, what combination you pick stocks from – one will ideally end flat with reasonable selection of stocks from this universe. While, this point is debatable but we leave that for some other day.
If we analyse schemes across these three categories – again the result is similar, number of schemes which are positive are handful. But to be fair, no one is hugely negative either (barring few odd names). Which shows that fund managers haven’t significantly outperformed (barring two multicap names) in these categories but by and large have been able to tow the market line. A deeper analysis of these schemes, will also tell that the ones which were more large-cap oriented have done better and schemes with Mid/small allocations have actually fared badly. One could argue and say – that’s the brunt of being honest with the objective of category.
| Large & Mid Cap | |||
| Scheme | 31-01-2020 | 23-10-2020 | % Change |
| Canara Rob Emerg Equities Fund(G)-Direct Plan | 108.83 | 111.9 | 2.8% |
| Franklin India Equity Advantage Fund(G)-Direct Plan | 85.4 | 79.26 | -7.2% |
| ICICI Pru Large & Mid Cap Fund(G)-Direct Plan | 357.37 | 333.32 | -6.7% |
| IDFC Core Equity Fund(G)-Direct Plan | 51.06 | 49.6 | -2.9% |
| Kotak Equity Opp Fund(G)-Direct Plan | 143.19 | 141.12 | -1.4% |
| L&T Large and Midcap Fund(G)-Direct Plan | 52.4 | 52.28 | -0.2% |
| Mirae Asset Emerging Bluechip(G)-Direct Plan | 62.13 | 65.27 | 5.1% |
| Tata Large & Mid Cap Fund(G)-Direct Plan | 242.44 | 236.57 | -2.4% |
| Multi Cap | |||
| Scheme | 31-01-2020 | 23-10-2020 | % Change |
| Aditya Birla SL Equity Fund(G)-Direct Plan | 829.74 | 805.07 | -3.0% |
| Axis Multicap Fund(G)-Direct Plan | 13.28 | 13.21 | -0.5% |
| Kotak Standard Multicap Fund(G)-Direct Plan | 40.51 | 39.19 | -3.3% |
| Motilal Oswal Multicap 35 Fund(G)-Direct Plan | 28.77 | 27.69 | -3.8% |
| PGIM India Diversified Equity Fund(G)-Direct Plan | 15.22 | 17.29 | 13.6% |
| Parag Parikh Long Term Equity Fund(G)-Direct Plan | 28.44 | 33.3 | 17.1% |
| SBI Magnum Multicap Fund(G)-Direct Plan | 55.04 | 52.32 | -4.9% |
| Focussed Fund | |||
| Scheme | 31-01-2020 | 23-10-2020 | % Change |
| Aditya Birla SL Focused Equity Fund(G)-Direct Plan | 67.81 | 66.79 | -1.5% |
| Axis Focused 25 Fund(G)-Direct Plan | 34.25 | 33.36 | -2.6% |
| DSP Focus Fund(G)-Direct Plan | 27.22 | 25.63 | -5.8% |
| HDFC Focused 30 Fund(G)-Direct Plan | 81.09 | 72.29 | -10.9% |
| ICICI Pru Focused Equity Fund(G)-Direct Plan | 31.35 | 33.33 | 6.3% |
| IDFC Focused Equity Fund(G)-Direct Plan | 43.07 | 44.85 | 4.1% |
| Motilal Oswal Focused 25 Fund(G)-Direct Plan | 26.7 | 26.96 | 1.0% |
| Nippon India Focused Equity Fund(G)-Direct Plan | 50.63 | 48.82 | -3.6% |
| SBI Focused Equity Fund(G)-Direct Plan | 168.33 | 158.72 | -5.7% |
- Mid Cap and Small Cap
We have more winners here and with very wide margins and range. Volatility is higher in these segments, and rotation of schemes which occur in Top decile is fairly fast. But in both the segments, we can still safely vouch for few schemes to outperform the index on a long term.
| Mid Cap | |||
| Scheme | 31-01-2020 | 23-10-2020 | % Change |
| Axis Midcap Fund(G)-Direct Plan | 45.16 | 47 | 4.1% |
| DSP Midcap Fund(G)-Direct Plan | 64.34 | 65.97 | 2.5% |
| HDFC Mid-Cap Opportunities Fund(G)-Direct Plan | 59.56 | 58.35 | -2.0% |
| ICICI Pru Midcap Fund(G)-Direct Plan | 104.74 | 101.34 | -3.2% |
| Kotak Emerging Equity Fund(G)-Direct Plan | 46.89 | 45.89 | -2.1% |
| PGIM India Midcap Opp Fund(G)-Direct Plan | 20.8 | 24.86 | 19.5% |
| L&T Midcap Fund(G)-Direct Plan | 148.26 | 147.84 | -0.3% |
| SBI Magnum Midcap Fund(G)-Direct Plan | 81.95 | 82.14 | 0.2% |
| Small Cap | |||
| Scheme | 31-01-2020 | 23-10-2020 | % Change |
| Aditya Birla SL Small Cap Fund(G)-Direct Plan | 34.64 | 33.54 | -3.2% |
| DSP Small Cap Fund(G)-Direct Plan | 60.19 | 64.48 | 7.1% |
| HSBC Small Cap Equity Fund(G)-Direct Plan | 50.42 | 51.31 | 1.8% |
| ICICI Pru Smallcap Fund(G)-Direct Plan | 29.05 | 27.98 | -3.7% |
| Kotak Small Cap Fund(G)-Direct Plan | 87.03 | 89.83 | 3.2% |
| Nippon India Small Cap Fund(G)-Direct Plan | 44.11 | 45.08 | 2.2% |
| SBI Small Cap Fund(G)-Direct Plan | 61.75 | 64.42 | 4.3% |
Summary:
In nutshell, we continue our quest for Alpha in the rapidly changing contours of Indian MF Industry. As the industry hikes upto 50Lac Cr AUM mark in next 3-5 years, it will become increasingly difficult for large-sized schemes to outperform respective Indices. Either fund houses will innovate with new themes, or fund managers will have to take extra risk to chase the mirage that is “Alpha”.
Either-ways we believe that migration of Active investors to Passive themes is here to stay. Case in point is US MF industry where passive funds overtook active funds in Aug, 2019. Now 50.1% MF AUM in US is held in passive strategies (ETF + Index Funds) against 49.9% Active AUM. In India the passive industry is about 21% of Equity MF category, as of Aug end.
For investors:
We implore our investors to consider Index funds against Large Caps which is not just a huge reduction on cost but also on the tribulation of regular monitoring.
There aren’t many index fund options (with reasonable AUM) as yet in the other categories – but time is not far when all other segments (Mid, Small, Multi etc) will have fair representation of Index funds. And therein will come the need to steer portfolios gradually from active to passive – slowly and steadily at the opportune moment. We at Moneyfront, shall be there, to safely take you through this transition.
“One of the most attractive elements of passive funds is their cost structure. Because these are based on indexes, there’s no need for a staff of two-dozen, Porsche-driving Harvard MBAs, so a minimum of your hard-earned money is consumed managing the indexes.”
