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Vaulting Over Volatility

Over the last three-year period, fund managers who have maintained a value-oriented investing approach, have seen their funds prosper


As 2009 ends, I’d prefer to analyse fund performance over three years rather than the customary end-of-year annual period. For the purpose of evaluating the performance of equity mutual funds, the last three years are an unusually useful period. Going back three years from the present time, the stock markets have seen practically every kind of situation that can test the judgement of an investment manager. 2007 saw the tail-end of a multi-year bull-run. Although the markets were strong during the period (the Sensex went up about 50% from 13,000 to 20,000 points), it was clear that there were dark clouds on the horizon. The sub-prime crisis in the US was fully visible by the middle of the year. Even though the US markets hadn’t had a severe crash, they were in retreat.

India, along with other emerging markets, still had equity markets that were charging up, powered by the huge inflow of money from foreign funds. At that time, there was this specious ‘decoupling’ theory that was doing the rounds. Decoupling claimed that  India  (and  China, et al) would not be impacted by the US’ troubles because their domestic growth had decoupled them from the developed countries. 

And then came 2008, the worst year in living memory, with stock prices falling in waves through the year and a complete collapse of hot sectors like realty and infrastructure. When the global nature of the crisis become clear late in the year, investors would have been justified in imagining that stocks would stay dead for years to come. However, 2009 was a year of the sharpest turnaround in living memory. The lowest point of the cycle actually came as late as March. Interestingly, the pivot point of the year was provided by a largely unpredicted externality, namely, the verdict returned by the people in the general elections in May. It was inherently not the kind of event that investment managers have any kind of expertise in predicting. All in all, the two rallies, and the one mother-of-all crashes, add up to an excellent proving ground for fund management.

During this period, the Sensex gained a total of 25 per cent, or about 7.8 per cent per annum. Interestingly, while looking at the entire cycle, it is clear that a majority of funds (92 out of 156) have outperformed the benchmark. During the turnaround in 2009, the indices had beaten a larger number of funds, but this phenomena just doesn’t exist when one observes the entire cycle.

Looking at the specific funds that have done well, one fact stands out. At the very top of the list, there are three dividend yield funds and one fund that is focussed on buying low-P/E stocks. These are Tata Equity PE (rank 3), ING Dividend Yield (rank 4), UTI Dividend Yield (rank 5) and Birla Sun Life Dividend Yield (rank 8). In terms of actual portfolios, these have been quite diverse funds — the only commonality has been in their theme. All along, by design, these funds have stuck to what, in practice, eventually boils down to a value-oriented approach to investing. That they have bubbled up to the top of the heap through a roller-coaster period such as 2007-09 is instructive.