Last week I wrote about equity mutual funds' performance for the last
one year and discussed the lessons to be learnt from the funds that
had been the worst-performing funds of the year. This week, I'm ready
with some (I hope) interesting observations about the best-performing
ones. However, I must confess that it's with more than a little
uneasiness that I'm doing these year-end lists. For the next few days,
newspapers and magazines are going to be full of 2007 this and 2008
that. We're going to be inundated with all sorts of lists, some
interesting and some useful and some so utterly pointless that they'll
leave you wondering why they were written at all. I think so many
lists are so useless not because the list-maker is doing something
wrong but that the calendar year is not a natural unit of time for
most human activities. Here I am, trying to see how mutual funds'
investments did over the last 365 days. However, by social convention,
I'm ignoring the fact these particular 365 days have no special
significance that is difference from any other 365 days. I mean I
could have written with great fanfare about investment returns from
September 15, 2006 to September 14, 2007 and that would be just as
relevant as the calendar year 2007. A sensible time period for
studying investment returns could be what can be called an entire
market cycle, that is, one entire bull-run and one bear phase. Such a
period tests fund managers' mettle and exposes their biases in a more
severe way than a straight trend. Anyhow, the fact is that people look
at the year as a basic unit of time even in areas where this doesn't
make sense and there's little point complaining that this doesn't make
any sense.
What do the year's top performing funds tell us? What really leaps out
is the success of mutual funds that describe themselves as
infrastructure funds, or which adhere to some other investment
universe that has something to do with infrastructure. Interestingly,
this is not something new-a similar list for 2006 had a somewhat
greater dominance of infrastructure funds. The somewhat clichéd
India-shining story is about building India, and anyone who is
interested in building India isn't having any problems doing well on
the stock markets. However, when I look at the broader picture then
the funds have performed best reveals a pattern similar to the ones
that have performed the worst. We saw last week that the bottom of the
list was stacked with specialised funds that adhered to a narrow
investment theme. Well, so is the top of the list. Of the top 20
funds, around 11 can be described as speciality funds. Doesn't this
disprove what I said last week? No. On the contrary, I think it proves
the point more emphatically. The problem with specialised funds is not
that they never do well, but that they tend to fluctuate from one
extreme to another. When the special idea that they are based on is
doing well, they are on top but when the going gets tough, then they
sink to the bottom. A performance ranking with speciality funds
stacked at the top and bottom is nothing surprising or contradictory.
So if you find infrastructure funds bunched up much higher than IT
funds this year, I think that says more about the risks of chasing
narrowly-defined past performance rather than what you should or
shouldn't do in the future.
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