Last Updated on December 29, 2021 at 1:02 pm
Let us find out how actively managed equity mutual funds have performed against reperesentative category benchmarks using the May 2019 Equity Mutual Fund Performance Screener. The screener compares every possible 1,2,3,4 and 5-year returns of active funds with indices from April 3rd 2006. So please note that we are evaluating performance over the last 13 years and not just the last few years to claim “this is the time to index”
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Definitions: (1) 70% or more five-year return outperformance filter. Suppose we have 200 5-year returns of both the index and fund. A fund would qualify only if it has beat the index at least 70% of 200 or 140 times. This is a reasonable requirement of an active fund.
(2) 70% or more downside protection consistency filter. Suppose for each of those 200 5-year periods, we consider the monthly returns of the index and fund. We check the fund return when the index return was negative and compute a quantity known as the downside capture. If the downside capture is less than 100%, then it means the fund has captured less than 100% of the index losses over a five year period. So we check if the fund has shown a downside capture of < 100% for at least 140 of those 200 periods (>= 70%). Again a reasonable requirement, in my opinion.
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We start with 169 equity funds across 7 categories (see table below) ==> Apply 70% or more five year return outperformance filter, the number drops to 76, a drop of 55% ==> Out of this 76, we apply a 70% or more downside protection consistency filter, the count now is 63, only a 17% drop.
Two takeaways at this point:
- If you are an active mutual fund fan, stop chasing returns! Chase downside protection first! Funds that consistently protect the downside also tend to produce better returns! Read more: What is mutual fund downside protection and why is it important?
- If you are worried about active fund performance, you are justified: more than half the number of funds across all categories have managed to beat the chosen category benchmarks at least 70% of the time. So it is pretty much impossible to judge which fund will beat the index in future. If you wish to stick to active mutual funds, more active management is necessary!
Now out of the above 63 expect 70% return outperformance over 4 years, the number drops to 50 (20% fall) ==> Add 70% downside protection, we are left with 46 funds (8% fall).
Now, if we independently expect the funds to beat the category indices at least 70% of the time over three years, the numbers drop from 169 to 54 (68% fall) and that is simply not acceptable for the high fee that they charge and the crores that they earn.
Category wise Performance
Now let us repeat the above exercise for each category. The column filter has three numbers. So if we take actively managed large cap funds as an example, there are 29of them (1st no), and if we apply >= 70% return outperformance consistency filter for 5 years, we only have 17 (2nd no) and if we apply the >= 70% downside protection consistency, we left with 8. This is shown below as 29-> 17-> 8. Now 29 -> 17 is not so terrible but 17-> 8 is simply pathetic. Also see: Only Five Large Cap funds have comfortably beat Nifty 100!
Note there are 48 large cap funds but 19 of then track the Nifty, Sensex or Nifty Next 50 and have been excluded in this study. Why exclude Nifty Next 50 funds? Because Nifty Next 50 is NOT a large cap index!
| Category | Benchmark | Filter |
| Large Cap | Nifty 100 TRI | 29-> 17 -> 8 |
| Multicap | Nifty Largemidcap 250 TRI | 42 -> 15 -> 14 |
| ELSS | Nifty Largemidcap 250 TRI | 31 -> 9 -> 8 |
| Large & Mid cap | Nifty Largemidcap 250 TRI | 20 -> 8 -> 8 |
| Value-oriented | Nifty Largemidcap 250 TRI | 14 -> 7 -> 6 |
| Midcap | NiftyMidcap150TRI | 19 -> 10 -> 9 |
| Smallcap | NiftySmallCap50-TRI | 14 -> 10 -> 10 |
Notice for Large-cap, Multicap, ELSS, Large and Multicap and Value-oriented categories, 50% or less than 50% of funds managed to beat the category index by 70% or more of the 5Y return periods considered.
One might argue that the Nifty Large Midcap 250 TRI is not a fair choice of benchmark. Now if all you have to do is to take 50% of Nifty 100 and 50% Nifty Midcap 150 to beat these categories, what does it say about “active management”. Oh by the way, as expected Motilal Oswal is unlikely to come with an index fund for this. If they do, then their own funds may have trouble beating this!!
To find out which funds made the shortlist and which fund did not get the May 2019 Equity Mutual Fund Performance Screener
Conclusion: Actively managed large cap funds have not been performing well enough long before the SEBI categorization came into force. If you think large and midcap or multicap funds are the alternatives, then the benchmark should shift from NIfty to something else (Nifty LargeMidcap 250 used here)!
I have said this before and I will say it again: Stick to aggressive hybrid, multi-asset or balanced advantage funds for guaranteed downside protection justifying the higher management fee. We shall consider how these have performed in another post.
Before we begin, some announcements: Check out the latest from freefincal on Youtube: What is the mood of the market before the Lok Sabha 2019 results? Also, Which category of mutual funds is best suited for retail investors?
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