Most top performing active MFs have value, momentum bias, says study

PhonePe Wealth report shows that value and momentum equity mutual funds dominated five-year rolling return performance across flexicap and diversified categories

Active equity mutual fund (MF) schemes that follow 'value' or 'momentum' investing styles dominate the list of consistent performers across categories in the past five years, a report by PhonePe's stockbroking platform Share.Market showed.

 

About 38 per cent of the consistent performers in the flexicap category largely follow the momentum investing approach, 25 per cent are 'value'-based, and 13 per cent fall under the 'quality' bracket. The performance analysis was based on the one-year rolling returns over the past 5 years.

 

Value investing is a strategy of buying stocks that trade below their perceived intrinsic or fair value. Momentum investing is based on the concept that stocks in an uptrend will continue to go upwards.  Quality is the third major investing style, which focuses on identifying companies with strong earnings and finances.

 

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While many fund houses stick to one of the styles, others maintain a diversification style across their schemes or are open to shifting between multiple styles.

 

Larger and mid-sized fund houses — Edelweiss, HDFC, Axis, Mirae, Invesco, HSBC, and Motilal Oswal — seem to have a bias towards one of the investment styles. On the other hand, Quant, ICICI Prudential, SBI, Aditya Birla Sun Life, Bandhan, and Kotak Mahindra seem to follow a relatively more diversified approach among their offerings, the study noted.

 

While the value and momentum factors outperformed for nearly the past 5 years, it may not continue. There have been instances (2018 to 2020) when 'quality' did better than 'value' and 'momentum'.

 

"With overall growth showing signs of slowing down and investor sentiments changing, maintaining sufficient diversification across investment styles could help mitigate the impact of cyclicality associated with the relative performance of investment styles. It would be a mistake to ignore the funds following a quality style of investing, even though they may not have a high performance consistency score over the past five years," said the report.