While we have been hearing debates about active versus passive, we have not given much thought to what has actually happened with active and passive funds and what is in store for these funds in future.
In this article, we will look at numbers to get clarity on active versus passive debate. So let us start with the performance analysis of large cap funds over different periods.
|
|
|
CAGR |
||||
|
Year |
Scheme Name |
1 Year |
2 Years |
3 Years |
5 Years |
10 Years |
|
2015 |
NIFTY 50 – TRI |
-3.0% |
12.5% |
11.7% |
6.6% |
12.2% |
|
|
Large Cap fund category average |
0.9% |
19.3% |
14.7% |
8.6% |
12.5% |
|
|
average under / outperformance |
3.9% |
6.8% |
3.0% |
2.0% |
0.3% |
|
2016 |
NIFTY 50 – TRI |
5.0% |
0.8% |
10.5% |
13.5% |
8.8% |
|
|
Large Cap fund category average |
3.8% |
2.3% |
13.7% |
14.9% |
9.1% |
|
|
average under / outperformance |
-1.3% |
1.4% |
3.3% |
1.4% |
0.3% |
|
2017 |
NIFTY 50 – TRI |
31.6% |
16.7% |
9.8% |
13.6% |
6.9% |
|
|
Large Cap fund category average |
31.8% |
16.2% |
11.0% |
15.2% |
7.3% |
|
|
average under / outperformance |
0.2% |
-0.5% |
1.2% |
1.6% |
0.4% |
|
2018 |
NIFTY 50 – TRI |
4.6% |
16.7% |
12.5% |
12.9% |
15.3% |
|
|
Large Cap fund category average |
-1.9% |
13.2% |
9.8% |
13.5% |
15.6% |
|
|
average under / outperformance |
-6.5% |
-3.5% |
-2.7% |
0.6% |
0.3% |
|
2019 |
NIFTY 50 – TRI |
13.5% |
8.9% |
15.6% |
9.4% |
10.2% |
|
|
Large Cap fund category average |
11.8% |
4.7% |
12.7% |
8.3% |
10.3% |
|
|
average under / outperformance |
-1.7% |
-4.3% |
-2.9% |
-1.1% |
0.1% |
|
2020 |
NIFTY 50 – TRI |
16.1% |
14.8% |
11.3% |
13.4% |
9.9% |
|
|
Large Cap fund category average |
13.9% |
12.9% |
7.7% |
11.0% |
9.8% |
|
|
average under / outperformance |
-2.2% |
-1.9% |
-3.6% |
-2.4% |
-0.1% |
Until 2015, large cap funds consistently outperformed the nifty TRI. However, these funds started underperforming after 2015.
Let us evaluate the performance of mid cap and small cap funds:
Mid cap
|
CAGR |
||||
|
Scheme Name |
1 Year |
3 Years |
5 Years |
10 Years |
|
NIFTY Midcap 100 - TRI |
22.95% |
0.50% |
10.40% |
10.25% |
|
Category Average |
24.23% |
4.16% |
10.85% |
12.81% |
|
Average Outperformance |
1.28% |
3.66% |
0.45% |
2.56% |
|
Absolute outperformance |
1.28% |
11.4% |
2.27% |
28.76% |
|
No of Funds |
25 |
22 |
21 |
17 |
|
No. of funds underperformed index |
10 |
2 |
7 |
1 |
|
Percentage of funds underperformed 40% |
9.09% |
33.33% |
4% |
|
|
AUM underperformed |
65.51% |
8.17% |
16.86% |
0.05% |
|
Historic performance as on Dec 31, 2020 |
||||
Small cap funds
|
CAGR |
||||
|
Scheme Name |
1 Year |
3 Years |
5 Years |
10 Years |
|
NIFTY Small Cap 250 - TRI |
26.8% |
-4.9% |
6.8% |
8.6% |
|
Average Performance of the category |
30.7% |
0.7% |
10.1% |
12.8% |
|
Average Outperformance |
3.9% |
5.6% |
3.3% |
4.2% |
|
Absolute Outperformance |
3.9% |
17.9% |
17.6% |
50.5% |
|
Number of funds |
21 |
15 |
13 |
10 |
|
No of funds underperformed |
10 |
3 |
2 |
1 |
|
Percentage of funds underperformed |
47.6% |
20.0% |
15.4% |
10.0% |
|
AUM underperformed |
56.2% |
7.0% |
2.7% |
0.1% |
|
Historic performance as on Dec 31,2020 |
||||
Both mid cap funds and small cap funds have outperformed consistently with healthy margin.
Now, the question is that why fund houses could not sustain outperformance in large cap space.
In my view, the reason for underperformance may be structural in nature than of skill and competence. Broadly, there can be two reasons – adequate flow of funds in index funds and ETFs from institutional players and narrow market rally. In narrow rally, only few stocks drive performance of index as we have seen in Nifty.
Actively managed funds cannot have a concentrated portfolio, as they are not allowed to invest more than 10% in single stock. To understand this phenomenon in some detail, let us look at yearly performance of Nifty since 2016 and contribution of top 5 stocks in the performance of the Nifty:
|
Year |
Nifty Return |
Contribution of top 5 stocks |
Returns from top 5 stocks |
Returns from rest |
Assumed LC fund returns from top 5 stocks |
Assumed LC fund returns from rest 45 stocks |
Simulated LC Fund category return |
Actual category average returns of LC funds |
|
A |
B |
C |
D (B*C) |
E (B-D) |
F (B*50%) |
G (E*50%) |
H (F+G) |
I |
|
2016 |
5.04% |
72.80% |
3.67% |
1.37% |
2.52% |
0.69% |
3.21% |
3.78% |
|
2017 |
31.59% |
48.60% |
15.35% |
16.24% |
15.79% |
8.12% |
23.91% |
31.80% |
|
2018 |
4.61% |
152.20% |
7.02% |
-2.41% |
2.31% |
-1.20% |
1.10% |
-1.91% |
|
2019 |
13.48% |
81.30% |
10.96% |
2.52% |
6.74% |
1.26% |
8.00% |
11.78% |
|
2020 |
16.09% |
81.70% |
13.15% |
2.94% |
8.05% |
1.47% |
9.52% |
13.94% |
Column A is year, Column B is the returns of the Nifty and Column C is the contribution of top 5 stocks in the performance of the nifty. You can see that top five stocks contributed 72.80% to Nifty returns in 2016. Column D is the contribution of top 5 stocks in the performance of the Nifty in absolute terms. For instance, in 2016, Nifty returns was 5.04% and the top 5 stocks contributed 72.80% to Nifty performance, that means, top 5 stock contributed net returns of (5.04%*72.80%) 3.67% to Nifty performance. Column E is the performance of rest of the 45 Nifty stocks or Column B (Nifty returns) minus Column D (top 5 stocks returns).
Now, assume that actively managed funds would have invested to the extent of permissible limits (10% maximum in single stocks and maximum 50% in the top 5 stocks). Column F captures this return. Column G captures the performance of the rest 45 stocks in which actively managed funds would have invested the balance 50% corpus. Finally, the total return of large cap funds would have been total of Column F and G, which is given in Column H.
Deduct the fund expenses, which could have been in the range of 1.50% to 2%. Take Column H and reduce it by annual expenses and compare this with actual category average returns of the large cap funds (Column I). This clearly shows that in spite of structural challenges, actively managed funds have added around 3% alpha.
Conclusion: If the market rally becomes broader, the current spate of underperformance in large cap category will come to end.
Vijai Mantri is Chief Investment Strategist and Co-Promoter, JRL Money. The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.
