Broad-based profit growth make the case of actively managed funds in 2024

Active largecap funds post improved performance in 2023, mid and smallcaps stumble

Actively managed funds, especially those with greater flexibility to invest in stocks across sectors and market capitalisation — such as multicap and flexicap — can outperform other schemes in 2024 if the prevalent trend in corporate earnings and profit growth sustains, according to analysts.

“Corporate profits are mean-reverting to higher levels. Also, the decade-long trend of profit concentration is reversing. For investors, opportunities of alpha creation go up with relatively undiscovered names garnering larger profit shares,” ASK Private Wealth said in a recent report.
 

In the last one year, flexicap funds have delivered 27 per cent return on an average. Multicap funds have generated 33 per cent return. However, their performance was overshadowed by smallcap and midcap funds. The two offerings have garnered the majority of flows in 2023 on the back of their performance.
 

Performance-wise, the key highlight of 2023 was the comeback of active largecap fund managers, who managed to deliver improved performance on the back of a broad-based rally.

Active largecap funds, which have the toughest job in terms of outperforming the benchmark, did better in 2023 as their bets in the mid and smallcap stocks paid off.

During the one-year period, almost 50 per cent of the active largecap schemes have delivered higher returns than the most popular passive offering in the largecap space — Nifty 50 index funds and ETFs.
 

“With earnings growth back to a larger cross-section of companies and sectors, the opportunity to generate alpha has gone up.

Run up in stocks of sectors like industrials, capital goods and hospitality, which are under-represented in the index due to poor performance over the past decade, gave a leg up to fund managers. They had allotted higher weighting to these sectors ahead of time due to high conviction,” said Sailesh Raj Bhan, chief investment officer (CIO), equity, Nippon India MF.
 

Active largecap fund managers face bigger challenges in their pursuit of alpha compared to those managing smallcap or midcap schemes. Among them are a limited set of stocks, negligible pricing anomalies or information asymmetry that help certain fund managers make outsized gains.

However, in 2023, it is the active midcap and smallcap funds that have lagged.

Experts attribute the underperformance to multiple factors such as the underperformance of largecap allocations and a sharp rally in some sections of the market where active fund managers have limited exposure.

Passive funds tracking the Nifty Midcap 50 and Nifty Smallcap 50 have topped the one-year returns chart (as of December 24) of the respective categories. They have delivered 48 per cent and 60 per cent returns, respectively. Compared to the broader index S&P BSE 150 MidCap Total Return Index (TRI), 28 per cent of the active funds have outperformed. In the smallcap space, 41 per cent of the active funds have done better than the S&P BSE 250 SmallCap TRI, shows data from Value Research.
 

“Alpha generation is typically cyclical in nature over the shorter run. In CY23, we have seen very broad-based performance across mid and smallcap stocks. This has primarily led to underperformance of mid and smallcap funds in general as the fund portfolios are typically smaller in terms of coverage of the segment,” said Harsha Upadhyaya, CIO-Equity, Kotak Mahindra AMC.
 

Overall, the smallcap space, followed by midcaps, delivered the highest return. Some analysts expect the momentum to shift towards largecap stocks next year.

“Largecaps can be the flavour of the market in 2023 followed by midcaps, if the foreign flows remain strong,” said Mukesh Kochar, national head of wealth at AUM Capital.