With an aim to encourage readers to analyse and evaluate mutual fund performance on their own, using my excel files when possible ;), I would like to post the analysis of a fund from time to time.
In the past, I have covered HDFC Top 200 twice:
and have covered Franklin India Blue Chip several times
This time I would like to discuss Reliance Growth.
Reliance Growth is, according to Value Research, a ‘multi-cap’ fund, presently with about 44% mid- and small-cap exposure out of its 95% equity exposure.
It is well known that Reliance Growth was the darling of investors not too long ago. It has an AUM of 4205 Crores. It is also well known that its performance has dipped in the recent past.
Here is how your investment would have evolved had you started a SIP on April 3rd 2006.
A CAGR of 7.75%. Not spectacular for a period of 7.9 years, but not terrible either(?!) This plot was generated with the automated mutual fund and financial goal tracker in development. If you would like to test it out, a beta version is available.
The aim of this analysis is not to pan the fund manager (too much!) or to criticise investors who continue to show faith it. The aim is to reiterate simple (enough) analysis techniques that can any investor (with inclination) can use to evaluate a fund performance. This post has been on the agenda for quite a while and got precipitated after a discussion thread in Asan Ideas for Wealth, FB group.
While this will not be an exhaustive analysis using risk and return metrics, I think it will be good enough for most investors to evaluate how consistent a fund is performing when evaluated with its benchmark.
A quick primer on rolling returns:
- 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 Dec. 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.
A more detailed explanation can be found here.
Now for the analysis
- First we use the Automated Mutual Fund SIP Returns Analyzer, select fund, select an index (Choose among: BSE Sensex, CNX Nifty, CNX Midcap, CNX 500 and BSE Bankex), select SIP or lump sum investment dates (after 3rd April 2006) and analyze returns.
- Bad news: performance for the last 4+ years has …. to say the very least, not been good. Reliance Growth is benchmarked with the BSE 100. Since there is almost 100% correlation between the movements of BSE 100 and BSE Sensex, the latter is a good enough ‘alternative’ benchmark
- Bad news: The recent poor run has affect ‘long’ term (5- 7 years) investors too
- Good news (?): There seems to be some improvement in the performance of SIP investments.
- I will soon be adding more benchmarks and update the format of this tool. The above figure is a collated view where I have added the index figures. The tool only displays only index figures. Since the tool is optimised for SIP returns, certain lump sum dates don’t seem to return results (blanks). I will try to fix this.
- To get a better idea about how consistent the fund has performed with respect to the Sensex we will use the Automated Mutual Fund Rolling Returns Calculator
This allows the user to evaluate rolling returns automatically from 3rd April 2006 onwards.
Here is the normalized plots of the fund wrt Sensex.
Notice that the fund has struggled to sustain momentum. While it recovered admirably from the 2008 crash, it fell back on the index late last year. Although it has since recovered, it is important to recognise that it is gaining lost ground.
Notice how the fund outperformed the Sensex just before the 2008 crash. This is typical of most equity funds. This reminds us of the importance of proper asset allocation depending on the time frame of investment. Too much equity can destroy a folio under such circumstances.
The one-year rolling return
These are point to point returns obtained using the compound interest formula. The numbers would more sedate if XIRR is used. This data is also available in the rolling returns calculator.
Notice that over 1-year periods the fund has performed like an index fund. Nothing abnormal about this. HDFC Top 200 and Franklin India Blue Chip are no different.
Now let us look at 5-year rolling returns.
Notice that the fund has behaved like an index fund since June 2008. This is simply not good enough for an ‘active’ fund, in my opinion, and stinks of a muddled approach. Why should I pay a hefty expense ratio (2.23% for the ‘regular’ fund) for a fund to perform like an index?
- Reliance Growth has been around for nearly 20 years has an excellent track record, until recently that is. Have a look
Spectacular, wouldn’t you say?! Sight for sore eyes. Here are the 15-year rolling returns.
In order to understand the reason for this long term outpeformance, one should plot the 1-year rolling returns since inception.
Notice the terrific run the fund had frominception till about mid of 2005. Since then the fund has behaved as an index fund!!
The huge gap between the fund and its index that we see today stems from gains made when the fund outperformed its index from inception to mid of 2005.
Investors from the early 2000s would still be sitting on good gains. More recent investors would probably be ruing their choice and considering their options.
Again, this is nothing special. Franklin India Blue Chip also has a similar history.
However, the long term rolling returns (5-year plus) of FIBCF or HDFC Top 200 does not merge with its benchmark for such extended periods as Reliance Growth has done – nearly a decade!
The more the I see such trends in active funds, the more I am convinced that passive or index investing is the norm and ‘alpha’ is either a random occurrence which you are lucky enough to be part of or cannot be sustained for long.
Have a look at the 5-year rolling returns since inception
The drop in performance is stark and quite dramatic. What is worse is that the standard deviation of these rolling returns is 3 times more volatile than BSE 100! (get more insights from the ‘analysis’ sheet). This suggests thatrisk that Reliance Growth takes is typically not proportional to the reward that it offers.
This is indeed troubling. If I were an investor (I am not), I would exit to greener pastures. Perhaps the fund performance would improve. Perhaps it would once again prove to be the darling of investors.
Exit or stay put, either way it is a risk.
Surely exiting to an index fund or passive fund based on CNX 500 (or a combination of Nifty and Nifty Junior) would involve lower risk than staying put in a fund that seems listless! Would you agree?
Do give the tools described here a try. You are sure to learn something new and surprising. Believe me, for I did and continue to do so.