Only Five Large Cap funds have comfortably beat Nifty 100!

Here are 5 large cap funds that have beat the Nifty 100 Total Returns Index. Rather, only 5 out of 36 large cap funds studied in the Dec 2018 freefincal equity fund screener have managed to beat Nifty 100 consistently over 3, 4, 5 years in terms of risk and reward. I am quite surprised more than half the active large cap funds have difficulty in offering consistent downside protection!

Screening steps

• Download the screener from the above link
• Select category as “large cap”
• For this study, I have removed all Sensex and Nifty based index funds as the comparison is with Nifty 100 and it would not be fair. I have retained 2 Nifty Next 50 Index funds (you don’t have to do this). This leaves us with 36 funds or 34 active funds.
• Demand: a downside protection consistency score of greater than or equal to 90% with regard to the Nifty 100 Total Returns Index. So here we compare the monthly returns of the fund with the index over every possible 5Y. The fund should have fallen less than the index when the index monthly return was negative with a consistency of 70% or more. See the screener download post for a technical definition.

• If we apply this downside filer for 5Y, the number drops from 36 to 20!
•  Apply the same downside filter for 4Y (in addition to 5Y), the number drops from 20 to 15.
• Apply the same downside filter for 3Y (in addition to 5Y and 4Y), the number drops from 15 to 14.
• This is a bit surprising that less than half the no of funds studied is able to deliver consistent downside protection!!!

•  With these filter on, ask how many funds have a rolling return outperformance score of greater than or equal to 70% with regard to the Nifty 100 Total returns index. This means that suppose we compute the return over 3Y in 700 different periods, the fund (direct plan) should have beat the index at least 490 times or more.
• Apply the rolling return filter over 5Y then the 14 funds drop to 6!!!
• Apply the rolling returns filter over 4Y and 5Y, the number remains at 6.
• Apply over 3Y,4Y and 5Y, we finally get 5 funds!!

Five Large Cap funds that have comfortably beat Nifty 100 TRI

• These 5 funds have beat Nifty 100 TRI at least 70% of 634 to 720 3Y returns studied with at least 70% downside protection consistency
• These 5 funds have beat Nifty 100 TRI at least 70% of 388 to 478 4Y returns studied with at least 70% downside protection consistency
• These 5 funds have beat Nifty 100 TRI at least 70% of 146 to 246 5Y returns studied with at least 70% downside protection consistency

If we ignore downside protection

Suppose we ignore the downside protection filer and only require rolling return outperformance consistency of 70% or above over:

• 5Y. We get 20 funds
• 4Y and 5Y, we still get 20 funds
• 3Y, 4Y and 5Y, we get 17 funds. Not bad, but two of then are Nifty next 50 index funds. So only 15 of the 34 active large cap funds qualify. Again less than half!

Summary

I am surprised that only 14 out of 34 active large cap funds have managed to provide downside protection with respect to Nifty 100 TRI. Forget about beating the index, downside protection is the bare minimum a fund manager should do! If you do want to shift from large cap funds to 50% nifty 50 + 50% nifty next 50, I think it is time to consider aggressive hybrid or balanced advantage funds or combine active funds with nifty next 50. At least they provide pretty much guaranteed downside protection (wrt Nifty 100). Readers must keep in mind that even if you assume downside protection is not necessary, the results are promising enough. Only 50% beat the index consistently and this does not bode well for the future.