We're transparent, not biased against fund managers: S&P's Benedek Voros

The S&P Dow Jones Indices periodically releases the S&P Indices Versus Active Funds (SPIVA) report for India, US and other regions, which puts a spotlight on the performance of actively-managed mutual fund schemes vis-à-vis their benchmarks. The latest report shows that nearly 90 per cent of Indian large-cap funds have underperformed their benchmark over a five-year period. Last year, one fund house released a report analysing the performances of active funds using the rolling return data to illustrate that they may not be doing as badly as it's being shown by reports based on point-to-point returns (like SPIVA). The author of the latest SPIVA report, Benedek Voros, director, Index Investment Strategy at S&P Dow Jones Indices, believes that their methodology is unbiased towards active fund managers as it follows a transparent process and comes out at a pre-decided schedule irrespective of the outcome. In an interview to Abhishek Kumar, Voros also shares the factors that lead to outperformance or underperformance of active funds. Edited excerpts:

The SPIVA report is based on point-to-point returns, which some mutual fund executives believe may not be the best metric to compare performances. What do you think?

We have a transparent methodology in place and it has been the same for the past 20 years. The study is published as per a pre-decided schedule irrespective of how it turns out (whether active fund managers look good or bad). For example, the latest SPIVA reports have a lot of positives on the active side, like US-based large-cap funds have improved their one-year outperformance rate to 45 per cent, which is the best since 2009. Moreover, the start and end dates lose significance if the analysis is based on long-term data like 10-15 years.

What factors decide the under-performance of active funds?
 

The two key factors are volatility in the stock market and the performance differential within indices. If there is a considerable difference between the constituents of an index, active fund managers have the opportunity to outperform by avoiding some worst performing stocks in the index. The outperformance also depends on the allocation towards 'other' categories. For example, if a small-cap fund has allocated some portion to large-cap stocks and these stocks do better than small-cap ones, then the fund has a good chance to outperform its benchmark which comprises of only small-caps.

Most Indian mid-cap and small-cap funds have been outperforming their benchmarks. Do you see this trend reversing with the rising efficiency in Indian markets?
 

Looking at what happened in the US, there may be a chance. In the US, the outperformance of active funds decreased with a rise in the number of professional investors and a decline in retail traders. There are a few academic reasons behind it. One being the theory that the stock market is a zero-sum game, which implies that the returns generated by professional managers come at the cost of retail investors. Hence, if the share of money being managed by skilled professionals will go up, the available opportunity for outperformance will decline.

There's one drawback of passives that's often talked about. Investors are forced to hold on to losers until those stocks are present in the index. What is your take on it?
 

The strength of passive investing is that it represents the whole stock market. Of course, there will be losers on the way but one should not fret too much about it. Studies show that stock market returns depend on a select few stocks. The focus should be to remain exposed to the real big winners which will eventually go up 10x, 100x or even a 1000x. Index investing makes this possible.

Is it the right time for Indian investors to take international exposure?

International diversification has a lot of advantages. At any given point of time, different countries are in different phases of their macroeconomic cycle. Also, every country has a skew towards a particular sector. For example, one country may be overweight on financials while another other on information technology. Hence, exposure to different countries allows a better portfolio diversification. With international investing, people also benefit through currency depreciation.