Largecap performance fades
Largecaps’ strong one- and three-year results weakened over 10 years. Stock picking has become crucial amid divergence in performance over the past 18-24 months. “Fund managers who pick stocks that are doing well and avoid the others can outperform,” says Anil Ghelani, head – passive investments & products, DSP Mutual Fund.
Index heavyweights weighed down the Nifty 50 and Sensex. Active managers underweighted them. “They also drew on the Nifty Next 50 constituents to outperform,” says Anup Bhaiya, founder, Money Honey Financial Services.
Largecap indices led earnings growth during 2000-2021, while the broader market’s earnings have grown faster over the past five years. “Stronger growth outside the segment creates opportunities for active managers to generate alpha,” says Prateek Agrawal, managing director (MD) and chief executive officer (CEO), Motilal Oswal Asset Management Company. Only 25.8 per cent of active largecaps beat passive peers over 10 years. “Market efficiency, portfolio constraints and costs make sustaining alpha difficult,” says Harsh Vira, founder and CEO, FinPro Wealth.
Midcap managers struggled
Midcaps’ reasonable one-year showing faded over three and five years. Ghelani says midcaps are no longer under-researched. Inflows lifted the entire segment, benefiting indices like the Nifty Midcap 150.
Many stocks with stretched valuations, thin earnings or heavy debt rallied. “Active managers who screen for balance-sheet strength, cash flows and promoter track records avoid them,” says Harsha Vardhana VM, founder and group CEO, Atom Financial Services. Inflows caused fund sizes to balloon. “Larger funds find it harder to build or exit positions without moving prices,” says Vardhana.
Smallcap funds’ strong one-year showing dipped over three years before recovering over five. Smaller, weaker companies led during the three-year period, hurting funds that held sensible portfolios. “Broad benchmark momentum or microcap rallies can temporarily favour passive indices over active managers who screen for earnings quality and governance,” says Bhaiya.
Use success rates with care
Success rates reflect past, not future, market conditions. Investors should not rely solely on them. Vira suggests that investors who use these figures should give greater weight to five- and 10-year numbers.
Match choice to temperament
Besides performance, investors’ risk appetite should govern the active-passive choice. Active funds suit investors who can tolerate underperformance. “Conservative investors anxious about lagging the index are better suited to passive funds,” says Abhishek Kumar, Sebi-registered investment adviser and founder, SahajMoney.com.
Use a mix across categories
Experts suggest using a mix of active and passive funds across marketcap categories. “Market efficiency, breadth of opportunities, and dispersion between companies differ across large, mid and small caps,” says Aparna Shanker, chief investment officer (CIO), equity, The Wealth Company Mutual Fund. Prefer passive funds in the largecap segment, where intensive coverage and institutional participation make it difficult to sustain alpha. Market inefficiencies and wider opportunities favour active stock picking in the midcap and smallcap segments. “Manager quality, risk controls and liquidity management matter more in these segments,” says Shanker. Shanker suggests that the core portfolio should hold low-cost broad-market passive funds. Active funds should be held in the satellite portfolio. “This structure balances core stability with tactical opportunities for higher growth,” says Kumar.
The writer is a Mumbai-based independent journalist
 "Nifty, Sensex, stock market, Nifty Midcap 100, Nifty Smallcap 100, IPOs, foreign portfolio investors, FPI flows, closing auction session, CAS, primary market, August market performance")