The improvement in the performance of actively managed mutual fund (MF) schemes is acting as a key tailwind for the nearly Rs 50 trillion industry, Kotak Institutional Equities (KIE) said in a report.
The report adds that the two largest listed asset management companies (AMCs) — HDFC and Nippon India — are likely to be the biggest beneficiaries.
“The industry has a solid track record of delivering alpha on 10-year returns (70-80 per cent of assets under management (AUM) beat the benchmark), with shorter duration performance also on an upswing.
The share of AUM outperforming on a five-year basis has improved to 55-60 per cent (from 35-40 per cent in September 2022) and on a three-year basis to 45-50 per cent,” the report noted.
The improvement in the performance of active funds is largely led by a better showing by fund managers in the ongoing financial year (2023-24, or FY24).
At the end of the first six months of calendar year 2023, 78 per cent of the active largecap schemes were ahead of the National Stock Exchange Nifty50 Index funds, compared to just 26 per cent in 2022, according to a recent study done by Business Standard.
However, the performance of active smallcap and midcap funds has dipped in the short term.
One of the factors contributing to the improvement in active largecap fund performance is an increase in market dispersion.
A high dispersion environment is favourable to active managers, as the wider breadth allows them to express their skills through buying/avoiding stocks and hence deliver performance that compensates for the management fees, said the report.
Active equity funds are a major source of revenue for mutual funds (MFs), considering they charge a higher expense ratio compared to passive funds.
According to KIE, the improved performance track record of active funds, along with the reliance on commission-based distribution, will keep passive fund adoption in check.
Distributors prefer selling active funds over passive ones due to higher commissions.
In addition, money is expected to flow out of portfolio management services (PMS) funds to MFs.
“We believe the MF industry is potentially a net beneficiary of outflows seen from PMS funds.
"Quite a few of these funds (large funds together managing around three-fourths of the discretionary PMS AUM) are experiencing net outflows over the past six to nine months, unlike the MF industry,” the report said.
The upside for shares of listed AMCs could be capped as there is limited room for further expansion, according to KIE.
Shares of HDFC and Nippon have gained over 50 per cent in the past six months.
In the second quarter of FY24, HDFC AMC reported an 18 per cent year-on-year increase in revenue, reaching Rs 765 crore, while Nippon’s revenue rose 15 per cent to Rs 475 crore.
Their net profits also increased by similar percentages, at 20 per cent and 18 per cent, respectively.