THE long-standing claim by fund managers that actively-managed equity schemes tend to outperform index funds over a longer period, may no longer hold water. The performance data of these schemes over the past three years show that index schemes have performed better than equity diversified peers.
In fact, mutual fund industry managers and watchers expect the superior performance of index funds to continue, going ahead, as the stock market turns more efficient and funds grow big enough to identify sufficient
‘multi-baggers’.
Index funds are passively managed and comprises a portfolio, which tracks and mirrors the components of an index. Diversified equity schemes are actively managed by fund managers. They argued that active fund management had the scope for outperformance because the relatively inefficient market gave them enough opportunities to gain from aberrations. In the bull market, the identification of a ‘multi-bagger’ — mostly a mid-cap stock, which doubled or trebled over a period — usually gave them that edge to perform better. But as recent market conditions were not conducive for picking a multibagger, returns from diversified equity funds lagged the index schemes.
An analysis by Benchmark Asset Management of 60 large-cap diversified schemes shows only 5-7 schemes have been able to perform better than index or exchange-traded funds. According to Value Research, a New Delhi-based mutual fund tracker, equity diversified schemes returned 9.19% over the past three years, while the Sensex and Nifty returned 11.71% and 12.25% in the period.
“This trend will continue because even as market evolves the skills of fund managers, relatives to markets are deteriorating,” said Benchmark AMC ED Sanjiv Shah.
The outperformance of index funds vis-à-vis actively-managed funds is a global trend, especially in developed markets like the US. In fact, several investors there are shifting a chunk of their money to passively-managed funds.
Domestic fund managers said the constant churn in equity schemes by investors is one of the constraining factor for the performance of actively-managed funds.
“If we were to follow the Warren Buffet style of investing (sell at higher levels, hold cash and invest at lower levels), then there is scope,” said a fund manager with a leading private mutual fund.
Benchmark believes controlling of costs (index funds — 0.5% a year and active fund — 2.5%) can partly reduce the level of underperformance of equity schemes.
“This difference of 2% per annum can balloon into huge difference over a number of years because of compounding. In the moderate return environment, it becomes a significant portion of your returns,” the Benchmark analysis said.
