90% large cap funds underperform benchmarks in last one year

90% large cap funds underperform benchmarks in last one year

About 90% of equity large cap funds underperformed the index in the one-year period ended June 2022. The beginning of the year was particularly tough for large cap managers, with 87.5% of the funds in the category underperforming in the first half of the year, the latest report by the S&P Indices Versus Active Funds (SPIVA) India Scorecard said.

In contrast, only 27.5% of mid/small cap funds underperformed their respective benchmarks. These funds fared the best by far in the long run among equity categories, with 53% of those to beat the S&P BSE 400 MidSmallCap Index over the 10-year period ended June 2022.

The Sensex was down 1.4% in the year till September.

Markets have become more efficient and are far more integrated to global markets, which is why outperforming benchmarks has become harder for active fund managers, particularly those managing large cap funds, said experts.

A fund manager’s flexibility for risk taking has been curtailed over the years. The regulator introduced its diktat on categorisation of funds in 2017, which has made the style drift difficult.

“The benchmarking of a scheme’s returns to total return indices, the polarisation of markets in the past few years and the higher expense ratios vis a vis index funds have made it harder for active large-cap fund managers to outperform the benchmarks,” said Vicky Mehta, an independent analyst who tracks mutual funds.  

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Mehta said while the disquiet among the investor community is understandable, things could change going forward if the index-heavy stocks start underperforming or non-index stocks start doing better.

Small and midcap fund managers, he said, have a larger universe of stocks (particularly under-researched ones) to choose from, which is why their chances of beating the benchmarks are higher. “Even average mid-cap funds have beaten the indices. That’s more to do with the construction of the indices, more than anything else.”

About three-fourths of ELSS funds underperformed their benchmarks in the past year. Notably, ELSS funds boast the highest long-term survival rates across all categories in the SPIVA India Scorecard, with 77.8% of them still surviving after 10 years.

Just 22% of Indian government bond funds lagged the S&P BSE India Government Bond Index in the first six months of 2022. This puts actively managed Indian government bond funds on track for their lowest underperformance rate since the inception of India SPIVA reports in 2013.

Underperformance of active managers for Indian composite bond funds was the lowest across all categories in the first half of the year, at just 19.2%. Over the 10-year period, however, the category displayed the highest underperformance rate across categories, with 98.1% of managers failing to beat their benchmark.

As frequently seen on SPIVA scorecards across geographies and categories, underperformance rates generally rose with the length of the period in which they were measured. Over the 10-year horizon, more than 60% of funds underperformed in all categories, except mid/small cap funds.

SPIVA India Scorecard reports on the performance of actively managed Indian mutual funds, compared to their respective benchmark indices over one-, three-, five- and 10-year investment horizons. It is not possible to invest directly in an index and index returns do not reflect expenses an investor would pay.

Some experts say that need to look at rolling returns together with point-to-point and risk-adjusted returns for judging a scheme’s performance. What’s more, not all schemes in the mutual fund universe use the benchmarks used by SPIVA.