The last fiscal ending March 31, 2011 was not an easy year for Indian markets. After moving in a range-bound manner for almost 10 months, the markets broke the upper-end of the range to scale a new high on November 5, 2010 propping up investor sentiment during the festival season of Diwali. The BSE Sensex made a new high of 21,108.64, while NSE’s S&P Nifty scaled to its all-time at 6,338.50 on that day. The uptrend in markets was supported by a recovery in key global economies and healthy growth in earnings by India Inc.
The markets, however, gave up half the gains thereafter. The inflation devil had already started to play up rising to levels that were beyond the comfort zone of the Reserve Bank of India (RBI).
Most of us know how the central bank has reacted to the trend in inflation, which is still running at elevated levels of over 9 per cent. It has hiked the repo rate, the rate at which banks borrow from RBI, 11 times (since March 19, 2010) or by a total 325 basis points (100 basis points is one percentage point) to 8 per cent currently.
In this context, fund managers, both on the equity and debt side, had a reasonably tough job on their hands. A rising interest rate environment also meant that debt fund managers had more work to do in terms of ensuring safety of capital and delivering decent returns to their investors. Equity fund managers, too, had a pretty tough task, especially post November last year, when the global environment started deteriorating and rising domestic interest rates meant an increase in risk aversion and flight to safety. Investors shunned companies with high debt, ones that needed capital for growth and also those which lacked sufficient bargaining power with suppliers and customers, a key factor that helps in sustaining profit margins.
It was in this backdrop that a four member jury headed by Ravi Narain, managing director and CEO, National Stock Exchange and comprising Vibhav Kapoor, group chief investment officer, IL&FS, Ashvin Parekh, partner, national leader – global financial services, Ernst & Young and Pradip Shah, chairman, IndAsia Fund Advisors met to pick the winners of the Business Standard Fund Managers of the Year.
The meeting kicked off with the jury members analysing the parameters used to rank the fund managers following which they sought the actual working of the rankings, including details on fund returns, standard deviation and more importantly, the adjusted Sharpe ratio.
The concept of ‘Adjusted Sharpe ratio’ or the weighted average Sharpe was introduced last year on advice of the jury members. While the Sharpe ratio measures the return for every unit of risk taken and is a better way to measure a fund manager’s performance rather than looking at absolute returns, the adjusted Sharpe ratio is a step forward. It also takes into account the total assets managed by a fund manager in relation to the total assets of the category, besides all the schemes handled by the fund manager.
Says a jury member, “It’s a much tougher job for a fund manager to manage a Rs 9,000 crore fund than an Rs 200 crore one. A ranking based on the weighted average Sharpe reflects the difficulty of yielding superior returns and takes into account the asset size. It also takes into account the performance of all the schemes managed by a fund manager.”
The data was provided by ICRAOnline. A composite score was ascertained for each fund manager comprising of the weighted average of the Sharpe ratio achieved by each scheme managed by him/her. The average one year corpus (based on month-end figures) of each scheme managed was used as weights to arrive at his/her score.
The deliberations went for more than an hour before the jury members were convinced on the parameters leading to finalisation of the winners. In the process of picking the winners, they sought finer details on each of the fund managers as well as the category. This involved looking at the Sharpe ratio on an independent basis (without applying the AUM weight) as well as the actual returns of delivered by the schemes managed by the fund managers, in what they termed as “consistency checks”.
In the debt category, the jury recommended a separate ranking for the long-term and short-term funds. Since there is little volatility in the case of short-term funds and the underlying instruments are different – in other words, the risk profile is different and they are different products – it was prudent to look at them as separate categories. However, since there was only one award to be given, the jury members unanimously decided to pick the winner from the long-term debt fund category.
The two fund managers who walked away with the awards are Prashant Jain of HDFC Mutual Fund for the excellent performance of the HDFC Equity and HDFC Top 200 schemes and, Chaitanya Pande of ICICI Prudential Mutual Fund for Medium Term Plan, Long Term Plan and Banking & PSU Debt Fund- Premium Plus. Notably, the adjusted Sharpe ratio achieved by the two fund managers were visibly ahead of the second best fund manager in the respective categories, reflecting their superior risk-adjusted returns.
In a bid to refine the process further, the jury members suggested inclusion of a threshold limit in terms of fund size. They said, although the weighting by assets managed is a sound method, a threshold limit will only make it stronger.