Have active large cap funds performed better after the March 2020 market crash?

Last Updated on March 15, 2022 at 9:54 am

A reader asks, “I notice that many large cap mutual funds have five-star ratings now. This was not the situation before the March 2020 crash. Can you please do a study on this?”

Results of active large cap funds vs benchmark study will depend on the duration of the returns considered and when the return was computed. To eliminate this bias, we compute rolling returns. That is we find every possible 1,2,3,4 and 5-year return since the inception of direct mutual funds – 1st Jan 2013 and find out how consistently a fund has outperformed a representative category benchmark.

These results are published monthly in our mutual fund screeners. If we use the March 2022 edition, we find that, over every possible 5 year period, only 8 out of 27 funds (excluding index funds and ETFs), have outperformed the Nifty 100 TRI consistently.

Consistency is defined as a better return than the index 70% or more out of all the rolling return periods considered. This is reasonable considering the exorbitant expense ratio paid regardless of performance.

So this is a poor outcome for active fund management and their investors. The “emergence” of index funds is not a recent development as we have shown before: Poor performance of active mutual funds: Is this a recent development? and Active mutual funds struggle to beat Nifty 50 for the last seven years! and Only Five Large Cap funds have comfortably beat Nifty 100!

Now to answer the specific question of performance has improved after the March 2020 market crash. For this, we shall consider trailing 5-year returns. That is the return over the last five years from any given date.

At least a five-year window is necessary as performance is hard to judge over shorter durations and can fluctuate.

First, let us look at the overview of the results. The data (list of funds) is presented below.

1. As of March 11th 2022, only six out of 27 large cap funds have outperformed Nifty 100 TRI (14.3167 %) over a trailing 5Y period.
2. As of March 11th 2021, only six out of 27 large cap funds have outperformed Nifty 100 TRI (16.5625 %) over a trailing 5Y period.
3. As of March 11th 2020, 14 out of 27 large cap funds have outperformed Nifty 100 TRI (5.3259 %) over a trailing 5Y period.
4. As of March 11th 2019, 17 out of 27 large cap funds have outperformed Nifty 100 TRI (13.7596 %) over a trailing 5Y period.
5. As of March 11th 2018, 19 out of 27 large cap funds have outperformed Nifty 100 TRI (14.0496 %) over a trailing 5Y period.

The first two entries are enough to conclude that active large cap fund performance has not improved since the March 2020 crash. In fact based on trailing 5Y return data alone, it has become worse!

Now if you look at the fund tabulated below it is quite tempting to choose X or Y fund which is common in all listings. Unfortunately, the list is similar to a game of musical chairs with old funds dropping out and new funds coming in.

That is, today it is easy to choose the best mutual fund based on past data. Whether it will remain on top after we start investing in it is anybody’s guess.  So the outperformance we get from active funds is essentially based on luck. Sometimes it works in our favour and sometimes not.

List of 5Y trailing return large cap fund outperformers

(1) As of March 11th 2022, only six out of 27 large cap funds have outperformed Nifty 100 TRI (14.3167 %) over a trailing 5Y period. Outperformers are listed in bold.

(2) As of March 11th 2021, only six out of 27 large cap funds have outperformed Nifty 100 TRI (16.5625 %) over a trailing 5Y period.

We shall now list only the outperformers.

(3) As of March 11th 2020, 14 out of 27 large cap funds have outperformed Nifty 100 TRI (5.3259 %) over a trailing 5Y period.

(4) As of March 11th 2019, 17 out of 27 large cap funds have outperformed Nifty 100 TRI (13.7596 %) over a trailing 5Y period.

(5) As of March 11th 2018, 19 out of 27 large cap funds have outperformed Nifty 100 TRI (14.0496 %) over a trailing 5Y period.