60% of large-cap schemes underperform as rejig in weighting hits showing

Three of five (60 per cent) equity large-cap schemes have underperformed the Nifty100 index this calendar year (CY20).Seventeen of the 29 schemes underperformed the benchmark’s returns of 11.8 per cent in CY20, shows the data from Morningstar India. Only direct plans were considered.

The worst performers include Nippon India Large Cap (1.5 per cent) and HDFC Top 100 (2.6 per cent). Four schemes have managed to give more than 15 per cent returns, with Canara Robeco Bluechip Equity Fund (20.2 per cent) and Axis Bluechip Fund (16.6 per cent) topping the charts.

Polarisation and the increase in index weight of a few a stocks have weighed on performance. As on November 30, the top five Nifty50 stocks contributed 42.6 per cent of index weight, with HDFC Bank (11.2 per cent) and Reliance Industries (11.2 per cent) making up the index weights. 

The top four sectors — financial services, information technology, oil and gas, and consumer goods — formed 79 per cent of the index weight. “Higher weighting of a few stocks on the benchmark indices is a constraint, both from a regulatory as well as from a prudent risk-management perspective. The category is capable of generating alpha over longer time frames. Several funds have delivered superior returns, even during times of acute polarisation,” said G Pradeepkumar, chief executive officer, Union Mutual Fund (MF).

The Nifty50 has rallied, thanks to the outperformance of a select few names, such as Dr Reddy’s Laboratories, Divi’s Laboratories, Cipla, Infosys, HCL Technologies, Wipro, and Asian Paints.

In the Nifty100 universe, 35 stocks have given negative returns and 50 per cent have underperformed the benchmark, shows the data compiled by BS Research Bureau.

Performance across longer time frames has also been impacted. Large-cap funds lag benchmark in the three-year and five-year periods as well, with average category returns of 7.5 per cent and 11.7 per cent, respectively, compared with returns of 8.8 per cent and 12.8 per cent for Nifty 100.

Experts believe large-cap schemes might see a further impact if market breadth does not improve. The Covid-19 pandemic is expected to tip the scales further in favour of companies with higher market share and well-entrenched businesses. This may exacerbate the problem of polarisation further.

Disillusioned by past performance, investors have begun gravitating towards index funds and exchange-traded funds (ETFs), which are passive funds and mimic the underlying benchmark indices.

“The myth of generating alpha has been debunked in the past one year. Investors are now willing to allocate 5-10 per cent of their equity portfolio to index funds and ETFs,” said a senior industry official.

Fund managers faced a tough time beating the benchmarks in 2018 and 2019, with large sums of money chasing too few stocks. Regulatory changes — such as categorisation of schemes as well as the introduction of total returns index in lieu of a simple price index — have also impacted performance vis-à-vis underlying benchmarks.

Earlier, the net asset value of MF schemes took dividends into account for computing returns. The schemes were, however, benchmarked against simple price-return indices that did not take into account the dividend component. The average annual dividend yield for Indian equities is 1-1.5 per cent.