{"id":10437,"date":"2016-12-21T13:12:08","date_gmt":"2016-12-21T07:42:08","guid":{"rendered":"https:\/\/blog.fundsindia.com\/blog\/?p=10437"},"modified":"2019-06-06T18:34:14","modified_gmt":"2019-06-06T13:04:14","slug":"2016-a-tough-year-for-funds-and-select-funds","status":"publish","type":"post","link":"https:\/\/fundsindia.com\/blog\/personal-finance\/2016-a-tough-year-for-funds-and-select-funds\/10437","title":{"rendered":"2016 \u2013 a tough year for funds and Select Funds"},"content":{"rendered":"

If 2015 was a frustrating year for equities, 2016 was yet another. Key equity indices \u2013 Nifty or the BSE 100 have remained flat over the past 2 years. On a point-to-point return basis, funds linked to these benchmarks did not move much. And our Select Funds<\/a>, despite holding a solid long-term track record, found it hard to either beat their benchmarks convincingly this year (2016), or seemed lacklustre when placed with their own category in other cases. Here\u2019s a low down on their performance and the reasons for such performance.<\/p>\n

Before we move on, we would like to emphasize that equity investing, especially through mutual funds, is a long-term proposition, and from that perspective, they have indeed delivered well. Proof to that lies in the data below, of the 3-year performance of our current set of Select Funds.\u00a0<\/a><\/b><\/p>\n

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 <\/th>3-year annualised returns ending Dec 15, 2016<\/th>\n<\/tr>\n<\/thead>\n
FundsIndia equity funds \u2013 moderate risk*<\/strong><\/td>17.4%<\/strong><\/td>\n<\/tr>\n
Large-cap category average<\/td>14.7%<\/td>\n<\/tr>\n
S&P BSE 100<\/td>10.8%<\/td>\n<\/tr>\n
<\/td><\/td>\n<\/tr>\n
FundsIndia equity funds \u2013 high risk*<\/strong><\/td>28.8%<\/strong><\/td>\n<\/tr>\n
Mid-cap category average<\/td>26.4%<\/td>\n<\/tr>\n
Nifty Free Float Midcap 100<\/td>24.4%<\/td>\n<\/tr>\n
*FundsIndia Select Funds as of December 15, 2016. Returns are point-to-point<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n

In the essay below, we\u2019d like to take a look at the past year\u2019s performance record of the market, mutual fund performance and performance of funds in our Select Funds<\/a> list for two purposes \u2013 one, as a disclosure exercise, as we like to keep you informed regularly about our fund choices, and two as an opportunity to take an inside look at different segments of the market and how funds made their investment choices in these segments.<\/p>\n

2016 performance<\/b><\/p>\n

Equity funds moderate risk: <\/b><\/a>Our Equity moderate risk category (including tax-saving funds), which is predominantly large-cap focused, delivered an average 4.5 per cent absolute return from the beginning of 2016, till December 15, 2016. It beat the large-cap category average by 100 basis points and the large and diversified category average by 50 basis points. However, the BSE 100 delivered 4.1 per cent thus reducing our margin of outperformance. And the BSE 100 is an important index to benchmark a large-cap oriented fund\u2019s performance.<\/p>\n\n\n\n\n\t\n\n\t\n\t\n\t\n\t\n\t
 <\/th>Returns (Jan 1, 2016 to Dec 15, 2016)<\/th>\n<\/tr>\n<\/thead>\n
Equity funds -moderate risk*<\/td>4.5%<\/td>\n<\/tr>\n
BSE 100<\/td>4.1%<\/td>\n<\/tr>\n
Large-cap fund category average<\/td>3.5%<\/td>\n<\/tr>\n
Large and diversified funds category average<\/td>4.1%<\/td>\n<\/tr>\n
*FundsIndia\u2019s Select Funds with quarterly changes made. Returns are point-to-point<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n
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Why was the outperformance of the Select Funds <\/a>better when compared with the category but narrower when compared with the BSE 100? One reason is that the stocks that outperformed in the BSE 100 were mostly in the metals and mining category that mutual funds hardly held, given the weak fundamentals.<\/p>\n

Vedanta, Hindustan Zinc, JSW Steel (despite its debt burdens) and NMDC to name a few were top performers in the BSE 100. And who held these stocks? Not many of the funds as these are short-term, momentum-driven calls that most fund managers are not comfortable taking. Either closed-ended funds or those that took derivative positions and hedged them were the ones to hold these stocks. Not holding these top performers meant compromising on returns for most funds.<\/p>\n

Funds that took very tactical or almost trading bets in sectors such as metals or oil and gas reaped benefits. However, such funds do not figure in our list as they do not boast of any consistent long-term track record.<\/p>\n

Another reason for the narrow margin of outperformance with BSE 100 is that funds took positions in sectors such as pharma or IT, either as defensive bets or because valuation looked more reasonable and were not rewarded.<\/p>\n

In our own Select Funds<\/a> list, we gave a long rope to some of the underperformers as our intention is not to frequently change the list based on short-term performance. We gave three funds the benefit of a long-term view and the leeway to turn around. The first is UTI Opportunities where there was change in fund management. The second was Axis Equity where the fund began to recover in the middle of the year against its category and was still holding above its benchmark. The third was BNP Paribas Equity which was hit severely by a few stock calls, especially in telecom. This leeway caused the performance to suffer. We have removed the first two funds from the list in the September review, since we did not see performance recovering anytime soon.<\/p>\n

That said, our list had some exceptional performers that not only topped charts but more importantly remained consistent. Funds such as Kotak Select Focus and SBI Bluechip were steady throughout. Others such as Mirae Asset India Opportunities and ICICI Pru Focused Bluechip Equity made a good comeback and managed to finish the year beating the BSE 100 by 4-6 percentage points.<\/p>\n

Equity funds high risk<\/a>: <\/b>Our equity high risk<\/b> category, though mostly comprising mid-cap funds, is not as risky in its behaviour as the general mid-cap fund category. The list is a mix of aggressive diversified funds and less-aggressive mid-cap funds.<\/p>\n

In this category, as is our overall philosophy, our aim is to provide you with a set of funds that will perform consistently with limited volatility (when compared to its category). While our funds have done that, their relatively conservative approach saw them losing out in the mad mid-cap rally that persisted throughout 2016. And this is reflected in their performance as well.<\/p>\n

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 <\/th>Returns (Jan 1, 2016 to Dec 15, 2016)<\/th>\n<\/tr>\n<\/thead>\n
Equity funds \u2013 high risk*<\/td>5.2%<\/td>\n<\/tr>\n
Nifty 500<\/td>3.7%<\/td>\n<\/tr>\n
Nifty Free Float Midcap 100<\/td>7.8%<\/td>\n<\/tr>\n
Midcap category average<\/td>5.5%<\/td>\n<\/tr>\n
*FundsIndia\u2019s Select Funds with quarterly changes made. Returns are point-to-point<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n

Similar to large-cap funds, mid-cap funds as a category underperformed the index by a significant margin. Such a trend is rare, as mid-cap funds are usually able to beat their benchmarks by a good margin. So, what happened in this space in 2016?<\/p>\n

For one, the Nifty Free Float Midcap 100 index has quite a few large-cap stocks, so to speak, that were hardly held by any midcap funds. It so happened that many top performers for the BSE 100 index were large-caps (from sectors that saw momentum rallies). The BSE 100 story is repeated \u2013 stocks such as Hindustan Zinc, JSW Steel and Cairn India were some of the Nifty Midcap 100 index outperformers.<\/p>\n

Second, as much of the quality mid-cap rally story was over in 2015, more risky bets took the front stage. Stocks such as Vakrangee, Jubilant Lifesciences, Tata Communications (held mostly only by Birla funds) and Ajanta Pharma delivered extraordinary returns. Very few open-ended funds even held them \u2013 similar to what we said earlier about large-cap funds.<\/p>\n

Summary of equity performance<\/b><\/p>\n

Just to summarise, fund managers seem to have been less swayed by short-term chart busters, willing to take some pain and hold sound, reasonably valued stocks, instead of simply chasing performance. This is a marked difference from 9-10 years ago, when funds picked momentum stocks.<\/p>\n

The 2016 performance of equity funds, FundsIndia\u2019s Select equity funds and the learnings from the year are:<\/p>\n