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Have Equity Funds Passed the Test

Check out how many equity funds have passed the test to live up to the definition of a true fund.

Ask any fund official, the hallmark of a true mutual fund? "One that outperforms both rising and falling markets," pat comes the simple answer. Well, it is easier said than done as most fund managers would have realised in the last one-year. We ran a simple check to see how many diversified-equity funds actually managed to stick to this dictum in the last two fiscal years, when the Sensex gained 34% between April 1, 1999 and March 31, 2000 while it lost 28% during April 1, 2000 and March 31, 2001.

The results, though hugely disappointing, were not unexpected. Only TWO funds - Kothari Pioneer Bluechip and Templeton India Growth Fund managed to beat the bellwether benchmark - both on the rise and on the decline. For instance, Kothari Pioneer's Bluechip comprehensively beat Sensex with a gain of 99% for the one-year ended March 31, 2000. For March 2001, the fund again outperformed the index when it lost only 26.28%. The two-year returns for both the funds are also rock solid - Bluechip returned 21.09% while Templeton India Growth was better at 24.61% on March 31, 2001.

Riding the highs and lows of the market
   As on 31/03/2000     As on 31/03/2001  
Funds  Returns (%)  Outperform (%)  Returns (%)  Outperform (%)
Kothari Pioneer Bluechip 98.91 65.19 -26.28 1.65
Templeton IGF 89.34 55.61 -17.99 9.94
Sector Average  78.19    -40.62  
BSE Sensex  33.73    -27.93  

Further, while as many as 27 funds from the family of 38 diversified equity funds surged past the 30-stock Sensex in 2000, only 6 funds could beat the index last year. Clearly, it is difficult to outperform in a bearish market. Thus, while most funds rode on the tech wave in late 1999 and early 2000, they were simply blown off when the ICE avalanche hit the market. In other words, most fund managers failed to anticipate the ensuing sharp down in technology stocks.

The reason for this steady performance of a couple of funds is not hard to see. Fund managers, who did beat the Sensex managed because they held on to a diversified portfolio and resisted the temptation to get overboard on tech stocks or any other sectors or stock. For instance, the average tech holding in the top performing equity fund for 2001, Templeton India Growth Fund was only 24% in the last one year.

On the contrary, the big guns of 1999 like Magnum Multiplier Plus, Alliance Equity and Birla Advantage maintained their concentrated investments, with more than 50% of their assets locked in the volatile sector. The one year decline in these funds reveals that -- ING Growth Portfolio (-75.95%), Magnum Multiplier Plus (-68.85%), Libra Leap (-62.98%), Birla Advantage (-56.91%), IL&FS Growth & Value (-56.12%) and Alliance Equity (-52.44%).

Underperformers
     As on 31/03/2000      As on 31/03/2001  
Funds  Returns (%)  Underperform (%)    Returns (%)  Underperform (%)  
Zurich India Capital Builder 7.94 -25.79 Magnum Multiplier Plus -68.85 -40.92 
Canglobal 10.96 -22.77 Magnum Equity -67.49 -39.56 
Canbonus 11.92 -21.80 Libra Leap -62.98 -35.05 
Master Plus '91 16.32 -17.40 Magnum Global -61.77 -33.84 
Dhanvikas (1) 18.61 -15.12 Dhansamriddhi -57.95 -30.02 

Diversification works since market's preference for sectors rotate. Thus, a few sectors or stocks cannot perpetually dominate investors' preference. Worse, they go out of favour abruptly without giving an opportunity to exit.

Morale of the story - diversify and prosper, else concentrate and suffer!