Guided Investing





Size vs Alpha : Follow-up 2021

Category : Investing, Mutual Fund · by Nov 14th, 2021

This is a follow-up on my last year’s article – Size Vs. Alpha. This year too, we will find out what Alpha the funds generated in different categories. To recall, Alpha is the excess return over the benchmark. If a fund generates more than the benchmark, it is positive Alpha and vice-versa. Naturally, investors would want positive Alpha from actively managed fund. This is the reason they are paying relatively high management fee to the AMC. We will see to what extent this is happening.

These are the categories of active equity mutual funds and their respective benchmarks:

Let us look at the top-5 and bottom-5 performers from each category. I have colour coded it from green to red – dark green being the best and dark red being worst. They are sorted on 5-year alpha. All data as on 31st Oct 2021.

I aggregated all the above into one composite dataset of ‘Average Alpha’. Which is – sum of all Alpha divided by the categories present. The average Alpha is only a “rough guide”. The numbers are not exact but an approximation. For example, a fund might just have a 4-year history. Obviously, the average 5-year alpha would be skewed a little. That’s the liberty I took to summarize and present data uniformly. To repeat, the numbers are not exact but very good approximation.

I have made a tiny change to the methodology – rather than looking at the total AMC AUM, I considered AUM of just these 9 categories only. Intuitively, this makes more sense since we are looking only at these 9 active equity fund categories. Naturally, the AUM rankings would have changed due to this. Second, for the fact that we are in a bull market, inflows in good performing funds have further swelled their AUMs and changed ranks.

All data is in descending order of their AUM ranks. Total AUM of these 9 active equity mutual fund categories is about 11.4L Crore. The numbers at the bottom of the table are their total AUM and % AUM (you will notice Pareto Principle at play here). I also took the liberty to divide the results into 4 parts. They are:

I – Wealth Creators: AMCs that performed well above benchmarks (unsurprisingly, same as last year):

II – Wealth Destroyers: AMCs which failed to generate wealth. Rather destroyed investor wealth by generating less than respective benchmarks. Worst offenders are HDFC, ICICI, Birla and Nippon (unsurprisingly, same as last year):

III – The Runner Ups: AMCs that tried but just fell short:

A note might be required here. SBI and Kotak MF have huge “brand” recall. They have the resources and balance sheet to attract the best talent. Yet they just manage to sail through. Kotak is present in top-3 in just 1 category, while SBI is present in just 2 categories. Are they turning complacent? Or have they turned into ‘asset gatherers’ from being asset managers? I don’t know. But numbers are not very encouraging from these two AMCs.

Though the numbers of Quant MF look astonishingly well, this is a new entrant (with the current management). Needs more time and at least a full market cycle to be classified appropriately. Hence same status as last year. Union MF has been a pleasant surprise. Decent numbers this year but they still have a long runway to cover.

IV –The Back Benchers: AMCs which delivered consistent poor performance:

Overall, not much change from last year’s results.

  • Big, established names have not generated Alpha for investors.
  • Young, smaller and nimbler AMCs have done much better.
  • Why this stark difference? There are no easy answers. And any answer will have loads of ifs and buts. And it will have onion like layers to peel through.
  • But to attempt – for one, check the media appearances of star fund managers of large AMCs vs fund managers of good performers. You will get a fair idea.
  • Second, MF is still a push product to a large extent. Larger AMCs have an upper hand with larger sales network, relationship with banking channels, bigger advertising budget etc. On the other hand, until 2 years ago, even many MFDs were not aware of an AMC called PPFAS! You will hardly see any banker pushing a product for Canara Robeco. IIFL is known more for its broking business than its MF. And so on. You get the drift.

Nothing is set in stone. One thing which is bound to happen is – these numbers will change next year. Running after the ‘best’ performing asset is futile. To take a sports analogy, world champion this year need not be the same next year or the year after. In a competitive event (or in a free economy) people find ways and means to do better. And these better performers will be rewarded.

As I say to my investors – asset allocation is more important than absolute returns. Having a tiny allocation to the best fund or stock is not going to change your life, however well that might do. Similarly, having disproportionate allocation to a single stock/sector/industry that you cannot sleep at night, is no solution either. Or having a portfolio of 30 mutual funds and/or 200 stocks is also a BIG no. You are simply spread too wide to benefit from any positive move. I repeat, asset allocation is the key. If you cannot find this ideal mix yourself, do consult an investment advisor. But do clean up your portfolio while you can and get your house in order. Make good use of this bull market.

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