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Are BIG mutual fund bets going wrong in 2018?

By Joydeep Ghosh and Sanjay Kumar
May 31, 2018 07:58 IST
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With fortunes of mid- and small-cap stocks turning from the year's beginning, two-thirds of big schemes have taken a knock in 2018.
Importantly, is there hope going forward?
Joydeep Ghosh and Sanjay Kumar Singh find out.

The start of 2018 hasn't been so good for mutual fund investors.

With returns of two-thirds of large-cap MF schemes in the red, it seems that the fabulous run investors had could be coming to an end.

Of the 204 large-cap schemes, including direct plans and exchange-traded funds, returns of 138 are in the negative, according to Value Research.

The category average returns of the large-cap funds is -2 per cent.

In comparison, the BSE Sensitive Index, or Sensex, for the same period, is up 1.7 per cent.

The Nifty 50 is marginally up at 0.1 per cent. Large-cap funds usually form the core part of an investor's portfolio.


Investment experts say this drop in performance is primarily because many fund managers invested aggressively in mid- and small-cap stocks.

"The basic reason is that these funds have strayed outside their mandates. In the last four years, many large-cap funds have taken higher risks and allocated a high portion of their portfolios to mid-caps and small-caps. This helped their performance in calendar years 2016 and 2017 and enabled them to beat their peers and benchmarks," points out S Krishnakumar, chief investment officer-equity, Sundaram Mutual Fund.

"The Nifty benchmark has only large-caps, but portfolios of many large-cap funds have 25 to 30 per cent mid-caps and small-caps," he adds.

According to him, with the mid-cap and small-cap segments correcting sharply since the beginning of the year, their portfolios are underperforming.

In 2018, the Nifty mid-cap 100 and Nifty small-cap 100 are down 11.9 per cent and 14.9 per cent, respectively.

What is interesting is that many schemes have slipped 5 to 16 per cent in such a short period, clearly indicating that some of the big bets seem to have gone wrong for fund managers.

"There is a particular reason why a large number of large-cap funds have underperformed their benchmarks' year-to-date returns. While technology and consumer staples have done well, a lot of fund managers were underweight on them," says Kaustubh Belapurkar, director-manager research, Morningstar Investment Adviser.

"On the other hand, they were overweight on metals, and that has given flat to negative returns."

There is a considerable divergence in returns when it comes to the financial sector.

Stocks such as Kotak Mahindra Bank and IndusInd Bank have delivered returns in double digits.

HDFC, which is a significant holding in portfolios, has not done too well, and stocks such as ICICI Bank, Punjab National Bank and some others have given negative returns.

However, Belapurkar believes the year-to-date comparison is too short a period to assess the performance of MFs.

He doesn't see the current underperformance as a concern, because over an entire cycle, the good fund managers will manage to outperform their benchmarks.

These are short-term aberrations that investors should not worry about too much.

There are a few caveats.

As the AUM grows, the ability of large-cap funds to generate alpha has been reducing.

Though it does not mean that the alpha has completely gone away, but it does become tougher for fund managers to beat the benchmark.

"At present, around 50-odd per cent of managers beat the benchmark over a five-year horizon. Over time it may come down," says Belapurkar. "But at present, it is 50 to 60 per cent which is not bad."

Illustration: Xavier

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