Going gets tough for fund managers in FY19, says study

3 out of 5 diversified equity schemes underperform benchmarks

Fund managers found it difficult to beat the benchmark indices in financial year 2019, with nearly three in five diversified equity schemes underperforming their respective underlying indices.

A study of 384 equity schemes that includes direct plans shows that 62 per cent have underperformed their respective benchmarks, data collated from Value Research shows.

A separate study released by S&P Dow Jones Indices revealed that 92 per cent of large-cap equity funds and 26 per cent of mid- and small-cap equity funds had underperformed their respective indices.

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.

The polarization of the market has resulted in the divergence of mutual fund portfolios from their respective benchmarks, believe experts. Benchmark indices have rallied on the back of the outperformance of a few select names, such as Tata Consultancy Services, Infosys, and Reliance Industries.

“There is too much money chasing too few stocks. The trend is expected to continue until such time that the broad basing of the market does not happen. With FPI money coming in the last few months, things may change,” said Swarup Mohanty, CEO, Mirae Asset MF.

"The past 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," added Dhaval Kapadia, director, portfolio specialist, Morningstar Investment Adviser (India).

Categorisation of schemes and the introduction of total returns index (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.

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.