Last Updated on August 30, 2021 at 8:07 am
Shyam Sunder asks, “I have been investing in SBI Bluechip Fund via SIP for about six years now. The fund has underperformed its benchmark for the last five years. Should I stop my SIP and invest elsewhere?” Let us discuss this dilemma faced by many large cap mutual fund investors.
At this point, it is quite easy to sing the praise of passive investing and to suggest Shyam shifts from SBI Bluechip Fund to a Nifty or Sensex fund. While that is certainly not bad advice, the performance of large cap funds should be viewed from a neutral perspective. We shall do so from the shoes of an analyst, and that of an investor and what investors wanting to switch to passive funds should appreciate.
Anyone who has spent time analysing large cap fund returns in a portal like Value Research would have noticed a big shift in positions. A few years ago if you were to sort funds by star rating, you would only see active funds five-star rated. A year or so ago, the situation changed topsy turvy: all five star rated funds were index funds. Today again there seems to be a shift: After the market crash 80% of active large cap funds outperform Nifty, Nifty 100 (this article was written in May 2020, the percentage has significantly dropped now but is still better than what it was in say Oct 2019).
If you had tried solving a problem before (physical or digital), you would better appreciate the situation here. It is a case of too many changes happening in a short time. First, SEBI asks funds to bin themselves into categories and classifies the top 100 stocks by market capitalization as large cap stocks and mandates funds in this category to hold 80% of such stocks.
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Next, the return difference between Nifty 50 and Nifty 50 Equal-Weight indices grew higher and higher, reaching an all-time high (Dec 2019). This market imbalance, where just a few stocks govern nifty returns, was briefly destroyed by the March 2020 crash but seemed to have reared its head again.
While large cap mutual funds changed composition during early, mid-2018, Nifty also became too dependent on its top stocks. This is a case of too many changes, and when you try to debug a problem, it is hard to identify the source.
When the benchmark holds 15% of a single stock (RIL), and when the weight of the top five stocks is the highest over the last ten years it is hard to judge actively managed large cap funds. See: These six stocks have dominated the Nifty 50 in the last ten years.
To understand what I mean, let us inspect the portfolios of funds that are currently five-star rated. For comparison, the top 3 Nifty 50 stocks (Oct 2020) are: RIL 14.9%, HDFC Bank 9.67%, Infosys 7.62%
- Axis Bluechip: RIL 8.33% ; HDFC Bank 9.61% ; Infosys 9.81%
- Canara Robeco Bluechip Equity Fund RIL 8.81% ; HDFC Bank 8.31% ; Infosys 8.14% ;
- Invesco India Largecap Fund: RIL 14.21%; HDFC Bank 9.58% ; Infosys 8.67%;
- Mirae Asset Large Cap Fund: RIL 11.68%; HDFC Bank 9.48%; Infosys 8.47%;
- Sundaram Select Focus Fund: RIL 8.89% ; HDFC Bank 8.16% ; Infosys 8.38% ;
The above list represents the stocks in the top 3/4 in terms of weight. In contrast, SBI Bluechip Fund holds RIL 4.95%; HDFC Bank 9.52%; Infosys 4.5%; This essentially means in Oct 2020 to beat Nifty/Sensex you must hold a good amount of the index top stocks because opportunities elsewhere are less. If you want your fund to be five-star rated, it must hold a good amount of index top stocks.
Analyst point of view: This would put any analyst into a pickle. Forget about star ratings – the business of comparing apples with oranges. Just a comparison with Nifty causes problems. Today the room for active management has become limited by the regulator and the market. Whether this is right or wrong, good or bad is subjective. The question analysts should ask is, is the Nifty or Sensex or Nifty 100 the right benchmark? The reason being: If the top stocks of an active fund are not the same as the benchmark, its returns would be poor.
Is it time for market capitalization-weighted indices to have a capping on weights? When strategic indices can have 5% or 10% weight cap, why not these? Are index curators worried their factor indices would take a hit if the mainstream indices are constrained this way? Even if we do not have answers, an analyst is obliged to ask these questions.
Investors’ point of view: The investor looks at only the returns. They do not care if the top stocks of their active fund are the same as that of the index or not. For the high fee they pay, they only want returns and this is fair. The problem is, an AMC chasing after AUM may be desperate enough to appreciate the market imbalance and fall in line with it. An established AMC with already enough AUM may feel otherwise.
In short, an investor has little control over which way the active fund manager would swing – with the wind and get five-star rated or against it and cause concerns. It is perfectly fine to stop your SIP in SBI Bluechip or any other active fund and shift existing and future investments into a Nifty or Sensex fund, however …
Do so only for the right reasons. Tomorrow the tide could change, and index funds could be pushed down to the bottom of the large cap ladder. There will always be some fund that is able to beat the Nifty. That fund will not always be your fund. Shift to passive funds only if you can appreciate this ground reality.
Do not shift because you looked at some trailing returns or rolling returns and found that beating the index is hard. If you do this then it would be no different than choosing a five star rated fund or choosing a winner. Choose passive investing due to its simplicity, not because of temporary high returns. The alternative is to wait for the market inhomogeneity to reduce, and then see how active funds fare but that could be one long, expensive wait.
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