Smaller is better in equity MFs

Measured by returns in 2013, the top 10 funds had only 3 from large houses; nimble strategy could be a factor

‘Small is beautiful’ appears relevant in comparing the performance of smaller equity mutual fund (MF) schemes with larger peers.

Among the top 10 equity schemes in 2013 by returns, it is the products from small and mid-sized fund houses that have stolen the limelight. The top three slots were taken by schemes of fund houses outside the 10 largest MFs by assets under management.

In the 44-member sector, with total assets of Rs 800,000 crore, about four-fifths of the money is managed by the 10 largest MFs. Officials and watchers said a key reason for their underperformance was the size of schemes.

“In difficult times, size is a hindrance. Smaller schemes can invest in niche space and benefit; larger funds cannot,” says Dhirendra Kumar, chief executive of Value Research, a Delhi-based fund tracker.

Religare Invesco Equity fund, Rs 25-crore in size, has made the largest amount of money for investors. Its return during the year was 19.3 per cent, compared with a seven per cent rise in the benchmark indices.

The next two top performers were Axis Long Term Equity and Tata Ethical Plan A, which returned about 16.5 per cent each in 2013. Taurus Ethical and Axis Equity found their way into the top list, with returns of 14.86 per cent and 13.49 per cent, respectively.

Three schemes from large fund houses' basket were able to join the top 10 — ICICI Prudential Top 100, IDFC Tax Advantage and Franklin India Smaller Companies fund.

An independent analyst, who did not wish to be identified, agrees with Kumar. “The year 2013 has been tough for fund managers. Many could not perform up to expectation. In such times, quick churning of portfolios is difficult for large-size schemes; smaller ones can do it with relative ease. This happened last year. But returns should not necessarily be a function of schemes' asset size.”

But, the theory of size impacting performance did not apply to ICICI Prudential Dynamic, a Rs 3,500-crore scheme. It was the fourth highest return making one in 2013, at 16.33 per cent. S Naren, chief investment officer (CIO) of ICICI Prudential MF, which manages the fund, says: "We created a counter-cyclical strategy, which works well irrespective of the size of the fund. This stance, along with the strategy of selling in a rising market and buying in a falling one, allows the fund to be well-managed irrespective of the size."

Religare Invesco Equity’s fund manger, Vetri Subramaniam, says: "(We) have a focused portfolio. This is reflected in a low number of holdings and in aggressive sector allocation. In a range-bound market like we have experienced over the past few years, all elements of the strategy have contributed."

Subramaniam said he did not believe size was a hindrance for performance. "Our simulation suggests this fund can continue to implement this strategy at much higher AUM levels than we currently manage. There are much larger funds that use asset allocation and they have also been top-quartile performers in 2013.”