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The Securities and Exchange Board of India (SEBI) has expressed concern over large disparity in performance of same category of funds – especially equity funds – of same fund houses. In a recent meeting with independent financial advisors (IFAs), a SEBI official said that mutual fund trustees should play an active role in monitoring fund management by asset management companies.
Citing example of a fund house (he did not mention the name of the fund), which has 17 equity funds with one giving a one-year return of 140 per cent and another giving just 20 per cent return, the SEBI official said such wide disparity in returns of equity funds of same fund house raises concerns over fund managers’ efficiency.
Value Research, in order to verify the concerns of the regulator, dug out returns data of all fund houses with multiple equity schemes (excluding sector funds) and took a close look at the variations shown in returns given by different schemes of within a fund house.
While we found that the returns given by the best and worst performing equity funds of same fund houses over a period of one year did show wide variations, the difference is more or less same across most fund houses, barring a few exceptions. Sample this, on July 16, 2010, Birla Sun Life Advantage gave the highest one-year return of 67 per cent, while Birla Sun Life Equity gave the least 19 per cent return among all Birla Sun Life funds. ICICI Prudential Dynamic gave the highest one-year return of 68 per cent on July 16, ICICI Prudential Discovery fund gave the least 20 per cent return. In DSP BalckRock, the highest one-year return was 64 per cent and the lowest 24 per cent. In UTI Mutual Fund, the best one-year return given by one of its equity fund was 71 per cent and the least was 16 per cent.
We asked fund houses the reasons for such large differences in performance of different equity schemes of a fund house and how do they justify these disparities.
Ashu Suyash, Managing Director and Country Head - India, Fidelity International, said, “For a fund house which is focused on retail investors, the ideal product strategy is to offer a good range of differentiated mutual fund products across different asset classes so that investors could choose the right mix of products and achieve their individual investment goals. “This requires fund houses to offer not only products across different asset classes but also multiple products investing in same asset class but with different risk-return profile,” she adds.
Different mandates and objective
Within a particular asset class – say equities, there are different strategies, objective and mandate of investment. While some investment styles follow the high risk-high gain strategy, others may follow low risk-low gain strategy depending on their objective and mandate.
Usually, most large-cap funds have lower risk than that of mid and small-cap funds. However, the returns from mid and small-cap funds could be better than the large caps, though consistency of the former is always an issue.
For instance, Magnum Mid Cap, which is a mid and small-cap fund from SBI Mutual Fund stable, gave a one year return of 30 per cent, 3-year annualised return of -4 per cent, and 5-year return of 16 per cent. Compare this to Magnum Equity, which is a large-cap fund. Its one-year return on July 16 was 29 per cent, three-year annualised return was 10 per cent and five-year annualised return was 26 per cent.
Besides, there are schemes based on a particular theme or sector. Returns from such funds can vary by a fair margin from those of diversified equity funds.
Fund manager’s role
Fund manager’s ability to pick the right stocks and his quick decision making skills is a key factor of a fund’s performance. Efficient portfolio managers could consistently outperform the benchmark indices, while providing sufficient downside protection.
Ravi Gopalakrishnan, Executive Director and Chief Investment Officer – Equity, Pramerica Asset Managers, said “Resources in terms of the size of the investment management team and the quality and depth of the research team affect the way a fund functions and the returns it is able to generate.”
The fact that there could be similar funds in terms of investment style and mandate within the same fund houses and yet give returns which could vary widely can very well be explained by a fund manager’s efficiency (or absence of it).
However, fund houses, we talked to, were unanimous in playing down the fund manager’s role in a fund’s performance saying that other factors such as objective and mandate of a fund play larger role in its performance.
Sanker Naren, Chief Investment Officer, ICICI Prudential Mutual Fund, said, “While fund managers form an integral part of fund management, there are also processes that facilitate improved efficiency and ensure the investor interest is safeguarded. Also, it is extremely important to remember that the fund performance is also a factor of the mandate of the fund.”
Ashu Suyash said, “Since different schemes of the same fund houses may have different investment mandates/strategies, it may not be appropriate to compare the performance of such schemes and attribute the outperformance of a fund to fund manager’s efficiency.”
Size of the fund
If not in all cases, there could be instances when large size of a fund could become a deterrent for some funds, especially, small cap funds. If the size of the corpus of a fund grows beyond a certain level, it could become difficult for it to find quality stocks in the small-cap universe to fit into the portfolio without negatively impacting the returns.
If a fund does not increase the number of stocks, fearing exposure to poor quality stocks, it is possible that the fund might end up buying stakes in a company beyond the permissible limits.
Other factors
Among other factors that can affect returns of funds include expense ratios and transaction trends. Typically, the higher the expense ratio of a fund is the lower the returns would be.
“Flows in the fund are also likely to have some impact on a fund’s returns. For example, if there is huge redemption pressure in the fund, the portfolio manager may be forced to sell certain holdings, which he may have bought with certain investment horizon and price targets in mind,” Suyash of Fidelity International said.
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