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Recently, a few fund houses like DSP BlackRock and Edelweiss have decided to benchmark their funds' performance using total return indices, i.e., indices that capture both the price and dividend income of constituents. Quantum MF has been showcasing its fund performance against total returns for a long time now. A Value Research analysis shows that the gains racked up by total return indices can be about 150 basis points more annually over a 10-year period, compared to a plain-vanilla index. Let us find out if this materially changes the outperformance of active funds.
Enter total returns
There are two key components of the total return you can make from a stock. First, you can get income and second, capital appreciation. Total return determines an investment's true growth over time, after factoring in dividends received. Hence, the returns of a total return index will be higher than that of the price-only index. As returns appear lower in case of a pure price index, its easier for a fund to show higher out-performance against it. When a fund compares itself with a price index, it is probably doing an unfair comparison. As the fund earns dividend income from its holdings, which are not captured in the benchmark, this can give an impression that your fund has done exceedingly well against the benchmark.
There is a disclaimer too. If the fund is investing in stocks that earn no dividend, then total returns will be same as price returns. But there are likely to be hardly any equity funds with portfolios which don't contain any dividend-paying stock.
Understanding the difference
For investors, it is important to understand the actual difference between total return and price return. Let us take the example of Sensex and Nifty. Over 5 years, the gains locked by Sensex's total return at 14.39% is 166 basis points more than the 12.72% annual price return. To illustrate, Rs 1 lakh will become Rs 1.82 lakh in 5 years at 12.72% CAGR. At 14.39% CAGR, Rs 1 lakh will become Rs 1.96 lakh in the same 5 years.
The table below shows how these two indices compare with their total return counterparts
| Returns (%) | ||||
| Index | 1-yr | 3-yr | 5-yr | 7-yr |
| Sensex | 11.52 | 5.98 | 12.72 | 7.55 |
| TRI Sensex | 12.98 | 7.45 | 14.39 | 8.67 |
| Nifty | 12.88 | 7.6 | 13.52 | 8.3 |
| TRI Nifty | 14.33 | 8.91 | 14.91 | 9.58 |
| Data as on August 31, 2017 | ||||
Funds scorecard
We have analysed the returns of funds with a 10-year history to compare them with their total return indices. The 34 schemes shortlisted, belong to different categories including ELSS, large cap, multi cap, mid cap and even infrastructure. Here is how they have fared against benchmarks and total return indices.
| Number of funds | ||
| Duration | Beating benchmark | Beating TRI |
| 1-year | 27 (79%) | 24 (70%) |
| 3-year | 31 (91%) | 31 (91%) |
| 5-year | 31 (91%) | 29 (85%) |
| 10-year | 28 (82%) | 21 (62%) |
| Data as on August 31, 2017 | ||
So, in the 1-year period, 9% of funds including HDFC Large Cap Fund and BNP Paribas Equity Fund, who earlier could have claimed alpha, cannot do so when compared with total return indices.
In the three year period, total return comparison, in this case, does not change active fund outperformance picture.
In the 5-year period, 6% of funds including Sundaram Select Focus Fund, who earlier could have claimed alpha, cannot now do so when compared with total return indices.
In the 10-year period, 13 schemes including Sahara Infrastructure Fund - Variable Pricing Option, HSBC Equity Fund, Escorts Growth Fund, and Aditya Birla Sun Life Infrastructure Fund did not beat respective total return indices.
So, as more fund houses disclose returns against Total Return Indices, the better picture one will get of the real alpha generated by active fund management.
Here is a list of funds that failed to beat TRI in two or more periods:
| Fund | Failed periods |
| LIC MF Equity Fund | 1yr, 3yr, 5yr, 10yr |
| Sahara Growth Fund | 3yr, 5yr |
| HDFC Large Cap Fund | 1yr, 3yr, 5yr, 10yr |
| Sundaram Select Focus Fund | 5yr, 10 yr |
| Data as on August 31, 2017 | |
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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