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An analysis of equity assets of active funds done by Kotak Institutional Equities shows that nearly 70-80% of the total active equity assets outperformed their respective benchmark in 10-year period.
Further, the report reveals that 55-60% of the total equity assets outperformed their respective benchmarks in 5 years and 45-50% of the total equity assets in 3 years post expenses.
The report says that the proportion of active equity assets outperforming their respective benchmarks has improved across time frames. For instance, 35-40% of the total active equity assets outperformed in 3 years a year ago.
Among active equity scheme categories, value funds did well in 10 years with 83% of its assets outperforming the benchmarks in 10 years. Large cap funds (76% of the total assets) and flexi cap funds (67% of the total assets) saw majority of assets outperforming in 10-year period ending on October 31, 2023.
In 5 years ending on October 2023, top three outperforming fund categories were small cap (80% of the total assets), value funds (59% of the total assets) and focussed fund (57% of the total assets). Further, value funds, focussed funds and small cap did well in 3-year period.
Overall, large cap funds saw recovery in alpha whereas mid cap/flexi cap struggled to deliver alpha in 1, 3 and 5 years. Small cap funds continue to do well across time frame in terms of alpha generation, reveals the report.
Further, majority of these funds have outperformed their respective benchmarks by at least 1.5-2% in 10 years. Please note that these are post-fee returns and represent very healthy outperformance, says the report.
The report reveals that funds which are more active in terms of portfolio construction did well in terms of outperformance. It said, “One of the approaches presented by research is evaluating the ‘active share’ for actively managed funds. Active share refers to the extent to which a fund portfolio deviates from the benchmark both in terms of weights and stock selection. A fund with a high active share would imply that the fund manager is willing to differentiate against the market (i.e., index). While a high active share implies a deviation from the index, it does not necessarily imply superior stock picking skill. However, research supports the view that when presented with favorable opportunities, high active funds have shown outperformance. Experience from the US market at the time of the dot com crash shows that funds with active share were richly rewarded during the 2000-02 bear market.”
“Our bottom-up analysis measuring ‘activeness’ of equity funds indicates that truly active funds richly reward investors, with top-quartile active funds delivering ~200-300 bps net excess returns (at lower expense ratios) over bottom-quartile funds across 3/5/10Y performance periods. We believe this is a crucial conclusion as it provides credence to the view that truly active fund managers have a rightful place given their ability to deliver alpha in the long term.”
