Regular readers of freefincal would recognize that the blog now has a decent set of resources for mutual fund evaluation and analysis.
I would like to encourage the use of these tools and calculators by publishing analysis of a few mutual funds from time to time. The aim is to make it clear that mutual fund analysis is not rocket science and can be done by anyone with an inclination.
In this post I would like to look at rolling returns data for Franklin India Blue Chip Fund, which requires little introduction. Many readers will be aware that FIBC is a 20 year old fund and an extraordinary alpha generator (alpha is the excess returns with respect to the fund benchmark - Sensex in this case).
Before we being a quick explanation of what a rolling return is. Suppose I want to determine fund performance from 1st Jan 2000 to 31st Dec. 2012, I choose some interval. Let say this is one year.
- I calculate the return for the fund and its benchmark from 1st Jan. 2000 to 31st Dex. 2000.
- Then from 2nd Jan. 2000 to 1st Jan. 2001
- Then from 3rd Jan. 2000 to 2nd Jan 2001 and so on until I reach 31st Dec. 2012.
- This 'rolling' return is then plotted against the duration used.
- If the funds rolling returns is higher than the benchmarks most part of the graph, you can conclude that the fund has been consistent in its outperformance.
- Rolling returns give you an idea about consistency of funds performance with respect to its benchmark.
The following graphs were obtained with the Automated Rolling returns calculator, posted earlier. Since I wanted to analyse FIBCs performance for as long a time period as possible, I have manually entered NAV date from the AMCs website and Sensex data from Yahoo Finance.
1. FIBC vs Sensex (July 1997 to Dec. 2013)
That is an amazing graph! The gap between the fund and its benchmark is a sight for sore eyes! The graph has been normalized (NAV and SENSEX made '1') from 1st July 1997. Therefore, this fantastic outperformance is valid only in the period displayed.
2. FIBC vs Sensex (July 1997 to Dec. 2013) 1Y Rolling Returns
Now that is not an amazing graph! For rolling returns, the value of the y-axis (returns) does not matter. What matter is this question:
Is the fund above its benchmark for a good part of the graph, or not?
Obviously when we consider one-year rolling returns from Jul. 1997 to Dec. 2013, the fund has not outperformed the Sensex.
So why all this fuss over FIBC? Watch what happens when the duration use in the rolling returns calculation is increased.
3. FIBC vs Sensex (July 1997 to Dec. 2013) 3Y Rolling Returns
4. FIBC vs Sensex (July 1997 to Dec. 2013) 5Y Rolling Returns
5. FIBC vs Sensex (July 1997 to Dec. 2013) 7Y Rolling Returns
6. FIBC vs Sensex (July 1997 to Dec. 2013) 10Y Rolling Returns
It is clear that longer the rolling return duration (and therefore the investment duration), higher the chances of outperforming the Sensex.
The point is, FIBC is not some magic fund which beats the Sensex year after year. It is a well managed fund which has beat the Sensex comfortably, provided one has shown faith and stayed invested.
Nothing new about this. Just good old common sense when it comes to equity investing.
The age of no alpha? The quantum of outperformance has decreased recently, regardless of the rolling returns duration. Does this mean we are entering into an age where it would be difficult to generate alpha? I don't know.
All I know is this. If we wish to get returns that beat inflation, index investing is more than enough. The need to beat inflation is plain investing common sense. The need for alpha stems from our desire to create wealth or to put it bluntly, our greed. We should not confuse greed with investing common sense.
The last 5 years? Many believe that the last 5 years has been the most volatile period of the stock market. Although this is not true (proof is here), our view point is most often defined by recent history. So let see how FIBC has fared in the last 5 years.
7. FIBC vs Sensex (Dec 2008 to Dec. 2013)
In the last 5 years, the performance has been pretty decent, if not spectacular.
8. FIBC vs Sensex (Dec 2008 to Dec. 2013) 1Y Rolling returns
9. FIBC vs Sensex (Dec 2008 to Dec. 2013) 3Y Rolling returns
The 1 year rolling returns for the last 5 years again resembles the Sensex closely. The 3 year rolling return is much better.
Bottom line: Only patient investors who have kept the faith in FIBC have been rewarded.
What about SIP returns? Here is a snapshot of results obtained with the Mutual Fund SIP Returns Analyzer
The SIP returns for the last seven years has been listed along with lump sum returns.
As you can see, returns have been pretty decent and consistent.
If you are interested in a what if calculation, that is, if you want to determine SIP returns from FIBC for any duration since inception, you could try this: Daily vs. Monthly vs. Quarterly SIP
What are your thoughts on the above data?
I do hope you agree with that the above 'analysis' can be done by anybody if they have the interest and about 15-20 minutes to spare. I urge you to analyze your funds with the available mutual fund evaluation tools. I will be more than happy to share your findings in the blog as a guest post if you would like to do so.
The following file was made in response to Ramesh's comment below.
The above analysis is based on bare Sensex data. That is one which does not include dividends. Swapnil wanted to know if it would make a difference if the dividends were included. I could not find such data for Sensex. Swapnil has given the link for the Nifty data with dividends included. So I have made a comparison of FIBCF vs. Sensex (bare) and FIBCF vs. Nifty (div. incl.) between 1st July 1997 t0 2nd Dec. 2013.
When we included dividends the outperformance is not as dramatic, especially in the last 10 years!!
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