Eight of 10 diversified equity schemes lag benchmark in past year

It’s not an easy time to be an equity fund manager. Nearly 80 per cent of diversified equity schemes have underperformed their respective benchmark indices over the past year.

A study of 392 equity schemes — including direct plans — shows that 310, or 79 per cent, have underperformed their respective benchmarks, shows data by Value Research.

Market observers have attributed this to large sums of money 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 BSE100 universe, for instance, nearly 70 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, 20 per cent of the 392 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.

“It could have been that some funds had to reallocate their portfolio because of categorization, and were unable to focus on their investment objectives,” said an MF official, requesting anonymity.

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. “We have seen good monsoon for the last three years and corporate earnings are set to improve. Retail investors should remain invested through this turbulent phase, which seems like an anomaly,” said Mirae Asset’s Mohanty.

“We expect a gradual recovery in GDP growth, and Nifty earnings growth of 13 per cent/15 per cent in FY19/FY20. This is an improvement over FY18, but more a reversion towards pre-disruption levels. Although India's demographics are better than those of peers, the best of the growth boost from its demographic dividend is likely behind it,” said a recent research note by UBS.

Large-cap schemes, however, may continue to find it difficult to generate alpha given the impact of TRI, believe experts.