Wishing you all a very happy and prosperous Diwali/Deepavali! Let this festival of lights give us freedom from the virus which has plagued our lives for the past 8 months! Let us get light after so many months of darkness and staying at home fearing for the virus!
It is time to take stock of the the investment space from last Diwali to this Diwali. In this article, I will analyze the performance of large cap mutual funds. How have they fared in the last 12 months will be the topic today.
Before we get into the topic of today’s discussion, if you are interested to know about the financial planning service that I offer, please click on this link.
Which is the best performing Large cap fund?
Returns in the last 1 year
The best performance is from Axis Bluechip and the worst from Nippon Largecap. The largest fund by AUM, ICICI pru Bluechip has under performed both Sensex and Nifty 50 Indices. Only 2 out of 7 have outperformed the index in this 1 year period. I agree that the last one year returns is not sufficient to pass any judgement on the actively managed funds. However, they have not been able to outperform the index for the last 3 year period as well.
Standard Deviation
This is a measure of volatility. To understand this, the last 1 year return for ICICI Pru Bluechip is 6.2% with a standard deviation of 19.2. This means the return could have been in the range of -13% to 25.4% (6.2% minus 19.2% to 6.2% plus 19.2%). Only Axis Bluechip has a significantly lower Standard deviation number compared to the index funds. The rest 6 of 7 funds have standard deviation very close to the index funds. Why invest in actively managed funds when their risk is not significantly lower than the benchmark?
Beta
Beta is the measure of sensitivity of a fund to market movements. The beta of the market is 1.0 by definition. So an index fund should have a beta close to 1. A fund which has beta of 1.1 will perform 10% better than the market in an up market and will perform 10% worse in a down market. Conversely, a fund with a beta of 0.85 will perform 15% better in a down market and 15% worse in an up market. From the list of 7 funds, only Axis Bluechip has a lower beta at 0.75, possibly due to its higher debt/cash allocation during the down market
(Source: Morningstar.com and investopedia.com)
Alpha
Alpha is the additional return that a fund gives above the market. A fund with an alpha of +5 is expected to give market returns plus 5%. Conversely, a fund with an alpha of -1 is expected to give market returns minus 1%. The desirable value of alpha for a mutual fund is as high as possible. In our list of 7 funds, only 2 funds have a positive alpha. Axis Bluechip has come tops with +5.61 and Mirae asset Large cap has +0.85. The remaining 5 funds have negative alpha, meaning they are expected to under perform the market. “Where is the alpha?” is a question we investors need to demand our fund managers!
(Source: Morningstar.com and investopedia.com)
Max drawdown
This measures how much was the loss for a mutual fund between a peak and the following bottom. If there are number of bottoms in a given period under review, the maximum loss is taken as the max drawdown. The lower the number compared to the benchmark, the better is the downside protection. It is the narrative by active fund managers that actively managed funds have a downside protection. In this list of 7 funds, Axis Bluechip again comes on top with the lowest max drawdown at 30%. The rest of the funds analysed have either similar numbers or more than the index. Here again, we need to question the funds managers “where is the downside protection?”
(Source: Morningstar.com and investopedia.com)
Expense Ratio
It is clear that 5 out of the 7 large cap funds have under performed the benchmark. The highest expense ratio of 1.23% is charged by HDFC top 100, followed by 1.09%, followed by ICICI pru bluechip at 1.09% and then SBI Bluechip at 1.07%. The Sensex index fund and Nifty fifty funds have expense ratio at 0.1%. When there is no out performance demonstrated by the actively managed funds, why should we pay the expense ratio and support the huge pay packets of the fund managers and the profits of the AMCs?
Change of AUM
Investors are noticing this under performance and moving their assets out of these under performing funds. This is visible in the below table
Axis Bluechip has grown AUM dramatically. Similarly, Mirae asset Largecap has also grown AUM at a good pace.
Takeaway
In the large cap fund category, the big mutual funds have under performed the benchmark. There is a good case for you as investors to move money out of actively managed funds and into index funds.
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