Mutual funds stress that past performance is no guarantee of future results. It’s something we will have to internalise, given that the performance of schemes has been veering wildly this year, particularly in October (see graphic). The only constant seems to be loss—the degree is the differentiator. So how do you track the performance of your funds over this volatile market cycle? MONEY TODAY teamed up with IDBI Capital to examine this degree of difference and analyse how the best performing funds fared from 5 March 2007 to 27 October 2008, the day when all equity fund NAVs touched a 52-week low. For the purpose of meaningful analysis, we split this period into three phases— 5 March to 17 August (when the Sensex gained 12.4%), 17 August to 8 January (when the Sensex touched an all-time high), and 8 January to 27 October (when the Sensex lost 59.23%).
PHASE I: 5 Mar-17 Aug 2007
This was a dream run for the JM Mutual Fund as it had three schemes in the top 10. JM Basic was the biggest gainer, followed by JM Hi Fi and JM Emerging Leaders. With a lead of 30% over the Nifty, JM Basic was way ahead of its peer set. How did it manage such a huge spike? The portfolio was beefed up from just 12 stocks (in November 2006) to 27. While this did well to mitigate the risk, the allocation to large-caps decreased. The holdings in Bharat Electronics, Siemens and Suzlon made way for stocks like Bharati Shipyard, Kalpataru Power, Greaves Cotton and the like. None of these stocks were made for falling markets, and JM Basic’s day in the sun ended with this phase.
JM Hi Fi is a classic case of great performance in booming markets, but pathetic when there’s a crash. The extreme swings in its performance are attributed to the fund’s large exposure to mid- and small-cap stocks. The fund has a narrow mandate, limited to housing, infrastructure and financial services. With the manager sometimes remaining fully in equity, there was no way to hedge or derisk the portfolio.
This narrow focus is a theme that recurs in other funds in the top 10 list. Both Birla Sun Life Infrastructure and Canara Robeco Infrastructure focused on the core sector. Two other funds were in the mid-cap space, and the rising market gave them greater momentum.
PHASE II: 17 Aug ’07-8 Jan ’08
The market was enjoying a bull run and the funds that were positioned to take advantage of the boom made it to the top 10. And no, the JM funds weren’t on this list, which was dominated by Sundaram BNP Paribas and Taurus Mutual Fund. Taurus funds always have a concentrated portfolio that either give excellent returns or send the fund crashing out. Taurus Starshare has over 20% of its corpus in two stocks, Crompton Greaves and JP Associates, while Taurus Discovery favoured Shiv Vani Oil, ABG Shipyard and Apar Industries.
The large-caps in the Sundaram Select Focus—RIL, ICICI Bank and Bharti Airtel—gained in this phase. Sundaram’s SMILE, with a mid-cap focus, had Divis’ Lab, Aban Offshore and IVRCL.
The Reliance Regular Savings Fund, which often takes a contra view, gave impressive returns, 93%, in 2007. When the category’s average allocation to basic engineering was around 12% in the first half of 2006, the fund had no investment in this sector. In 2007, when others were betting on the energy sector, the fund took an exposure to this sector from July onwards and maintained an average allocation of 4% for the rest of the year. Thanks to its contra play, it did not fall too heavily in the downturn either.
PHASE III: 8 Jan-27 Oct 2008
When the Sensex crashed, it was time for the old warhorse, UTI, to prove its mettle. UTI has three funds in the top 10, proving its ability to handle risk. The focus on the hi-tech (16.4%) and energy (16%) sectors helped UTI’s Variable Investment Scheme to cushion losses elsewhere. In case of the UTI Dividend Yield Fund too, this focus helped.
“That these funds have lost less than the benchmark means they have performed the mandated task,” says R. Swaminathan, head, institutional business, IDBI Capital. That’s really the key—understanding that loss is a part of the investment process, but that the degree of loss can be minimised.
In the current context, there are still some funds that have fared well. That doesn’t say too much, because in investing, as in physics, what goes up eventually comes down. The trick is in finding an asset class which offers some protection against the erosion of the capital. The only way out is to opt for an asset class whose returns are not linked to the stock market. That’s what the arbitrage funds offer. These funds are ideal for risk-averse investors, and are also more tax-efficient than the debt funds (as they are treated as equity funds). Along with the gilt funds, arbitrage funds are the best you can get in the current market. If you are more aggressive, there are any number of equity funds. Choose wisely and you can weather any downturn.
The fortunes of a mutual fund vary over time. The 10 worst performers this year (Table 4) constitute several of the best performers in the preceding 10 months (Table 1 and Table 2). The caveat that past performances do not indicate future returns holds true. The best performers this year are funds that have lost less than what their benchmarks have, and this shows they managed the risk better than others (Table 3).PHASE I
5 MAR - 17 AUG 2007
This was a dream run for the JM Mutual Fund, with three of its schemes figuring in the top 10. With a lead of more than 30% over the Nifty, the JM Basic Fund was way ahead of its peer set in the diversified equity category.