Guided Investing

Size vs Alpha

Category : Investing, Mutual Fund · by Nov 7th, 2020

My earlier post on Alpha was restricted only to Multicap Equity Funds. I wanted to do a larger study across all Equity MF categories. My gut said the same story would play out across board – big boys (large AMCs) not generating Alpha; newer/smaller AMCs doing so. But gut feel has little or no place in investment world. One needs factual data to prove or disprove a theory. So, here we go.

In this post, we attempt to find relation between Alpha and Size, if any. To do that, first we rank AMCs on their AUM and then look at Alpha generated across categories. Why are we not looking at fund size – because there is no commonly agreed levels or definition of what is small and what is big. Is 2000 Cr a big fund or 20,000 Cr a big fund? On the other hand, ranking on total AUM is unambiguous. Hence this method. Let me also add – this post is neither a recommendation nor a dissuasion of any AMC, category or a fund. We are attempting to analyze data and present it with an unbiased view for you to make an informed decision.

To begin, let us look at AUM ranks – current and historical.

AMCSep 2020Sep 2019Sep 2017Sep 2015
AUM ranking over last 5 years

We see that ranks have not changed much over the years for the top dozen or so AMCs. There is certainly rotation amongst them. We can see that:

  • SBI has been gradually increasing its AUM. Among other things, a major contributor is EPFO inflows in its Nifty ETF fund.
  • HDFC, ICICI, Birla and Nippon – ranks 2 to 5 keeps rotating between them.
  • UTI and Franklin have seen steady decline in AUM.
  • Others like IDFC, DSP, L&T and Tata have been just about maintaining their spot.

Now that AMC ranking is clear, let us also understand what is Alpha. The excess return over a benchmark is called Alpha. It can be positive or negative. Excess returns over benchmark would be positive alpha. Similarly, less than benchmark returns would mean negative alpha.

SEBI has classified equity mutual funds into 10 categories. For this study, I ignored 2 of them: Dividend Yield – it hardly has any AUM (or interest); and Thematic/Sectoral – it has a very wide variety to be able to arrive at category Alpha. And I immediately faced a challenge here. AMCs choose their own benchmark. Which means, a category can have multiple benchmarks. So, for this study, I shortlisted the one which was chosen by most funds in that category. This is not a perfect solution but a solution nevertheless. The eight categories and their respective benchmarks are:

1LargecapNifty 50 TRI
2MulticapNifty 500 TRI
3Large and MidcapNifty LargeMidcap 250 TRI
4MidcapNifty Midcap 100 TRI
5SmallcapNifty Smallcap 100 TRI
6Value/ContraNifty 500 TRI
7FocussedNifty 200 TRI
8ELSSNifty 200 TRI
Equity MF categories and their benchmarks

In investing world, there is no consensus on “long term”. Different people have different measures. Income tax says 1 year. Warren Buffett might say 10 years (or even more). You and I might have some other number in mind. By commonly accepted terms, 5 years is a reasonable timeframe to gauge whether something is working or not. So for this study too, I considered 5-year returns. From these 8 categories, let us now see the Top 5 and Bottom 5 funds for worst and best 5-year returns. For easy readability, I have colour-coded the Alpha from green to red. Dark green being the best and dark red being the worst:

(All data as on 30-Oct-2020, unless specifically mentioned)

Large Cap Equity Funds:

Multi Cap Equity Funds:

Large and Mid-Cap Equity Funds:

Mid-Cap Equity Funds:

Small-Cap Equity Funds:

Contra / Value Equity Funds:

Focussed Equity Funds:

ELSS Equity Funds:

Well, for one, this is a lot of data. And it is difficult to make meaningful inferences from such diverse datasets. So, I aggregated it into one composite table. And immediately, I ran into second issue. How do we compare a fund that is present in 8 categories vs a fund that has only 2? To overcome this, we will use Average Alpha. How – assuming someone invested across all 8 categories of say, AMC A, then what would have been the total excess return over multiple time periods. Similarly, say AMC B has only two categories, then the total excess returns for the investor across those two categories. Due to SEBI re-classification, some funds have changed their categories. But such cases are few and far. I decided to ignore them for the study. I also took the liberty to divide the results into 4 parts. They are:

I – Wealth Destroyers: Big boys or top ranked AMCs failed to create wealth. Hardly any worthwhile Alpha even in 5 year period. Worst offenders are HDFC, ICICI, Birla, Nippon and Franklin.

II – The performers: Smaller and/or newer AMCs are wealth creators:

III – The Runner Ups: Funds that tried but just fell short. Another way to look at it is – might have future potential:

IV –The Back Benchers: AMCs that neither have AUM nor performance to boot:

We can make these conclusions:

  • Top 5 AMCs (SBI, HDFC, ICICI, Birla and Nippon) have been wealth destroyers. No positive alpha to speak of. Yet they continue to brainwash investors with their constant drumming of “SIP” and “long term”. Coupled with their large distribution network – they continue to amass AUM and yet show no value addition. Together, they account for more than half of industry AUM. Let that sink in.
  • Axis MF has been a steady performer. Investors have rewarded it with ever increasing AUM. PPFAS and IIFL have just 1 fund in Equity and they are category leaders. This shows FOCUS. Mirae and Canara also stood out with consistency.
  • Kotak MF has been the most “index hugging” among the large AMCs. Very surprising indeed. With all the talent and resources available, they just managed to beat the benchmark.
  • There is nothing to speak about the last group. Some are very new with less than a year while some are 20-year old. Are we staring at another round of consolidation in the MF industry?

Top 5 AMCs (SBI, HDFC, ICICI, Birla and Nippon) have NOT generated Alpha in last 5 years. Together, they account for more than half of industry AUM. Let that sink in.


(34) comments

3 years ago · Reply

Excellent Article

Arvind Kumar
3 years ago · Reply

Very well written from a new perspective.
Please continue like this to enlighten the investors.
Thanks a lot.

3 years ago · Reply

Very nice article. In case you have data, is it possible for you to show relation between size of AUM and performance over period, say 5 years? This is on lines of Insider trading in equity in which informed/ institutional investors make move in/out of AMC before change in performance?
Thanks in advance

    Anand Gupta
    3 years ago · Reply

    Sorry, your query is not clear. Can you clarify with some example

Dhanesh shah
3 years ago · Reply

Very interesting and meaningful analysis..

Mr. Bharat Bagla
3 years ago · Reply

Surely a lot of hard work must have gone into this compilation. Well done.

Q. Does this mean distribution is the only key to size ?
Q. Do investors not see any data?
Q. Do investors seek alpha?
Q. Can such large allocations be possible due to brainwashing and distribution might alone?
Q. Does expense ratios have a role ?
Q. Does brand of the AMC have a meaningful role?

So many thoughts… but good work for sure. Thanks for sharing

    Anand Gupta
    3 years ago · Reply

    Good set of questions. Do attempt to answer with relevant data. Would love to hear your opinion.

Sanjiv Thapliyal
3 years ago · Reply

Very Interested.Last 5 Yes Proformance & Knowledgeable

3 years ago · Reply

Interesting..but sir, top brands acquire stocks since long anytime alpha can be bounce back & smaller AMC buying stocks at recent times only that point of view laggers will become super gaints right…?

    Anand Gupta
    3 years ago · Reply

    Sorry, but your queries are beyond my scope. Please get in touch with your Advisor.

3 years ago · Reply

thank for sharing this viewpoint

3 years ago · Reply

Why uti not shown in performer?

    Anand Gupta
    3 years ago · Reply

    OK let me attempt. With Alpha of negative 8.68%, how can it be a performer ?

      Pankaj vyas
      3 years ago · Reply

      Before 3 years , categorisation happened in industry and after that performance of UTI is visible in almost every equity category.

      Pls check the performance or else you can contact us for more details.

Sunil Kumar, Chennai
3 years ago · Reply

Very good article for decision making of the choice of schemes based on AUM.

May be,Fund managers has more flexibility to churn stocks in smaller AUMs during the volatile times like we witnessed last 3 years.

    Anand Gupta
    3 years ago · Reply

    a) Never decide investments based on AUM. Talk to your advisor.
    b) Maybe. But consider this – if Axis MF can outperform, what is stopping others? Definitely not size.

Sumit Srivastava
3 years ago · Reply

Well beating the the benchmark is not the ultimate goal of AMCs or investors but beating the other available investment options with great ease & flexibility certainly is. Let’s understand it with actual return of a scheme in the large & mid cap category ( name withdrawn for an unbiased view and I am terming it as Scheme A). As on 30.10.20 Scheme A has generated a return of 9.95% is last 5 years whereas the benchmark Nifty Largemidcap 250 TRI has given 9.13 return in same period and category average return is 7.64%. Now as per the abo e article, Scheme A has generated a positive alpha of 8.98% and category average has generated a negative alpha of 16.31. Now in the similar fashion the above article is highlighting a 7.64 return in last 5 years as -ve 16.31% return to create a negative impression about the industry in the bad taste. Whereas I believe a 7.64% annualized return is not bad given an unprecedented pandemic era of last 8 months.

    Anand Gupta
    3 years ago · Reply

    Those are your opinions. Everyone is entitled to one.
    With regard to “showing industry in bad light” – its quite the opposite actually. I am showing what worked and what did not. Depends on how one looks at it – glass full or glass empty.

Jawahar Bansal
3 years ago · Reply

sir it is a eye opener data, since last few year my observation is same , ( Q1) Is it worth paying 2% fees to fund manager । thanking you sooooo much

Invest Bazar
3 years ago · Reply

Sir ,
Can you do the same analysis for debt funds / Hybrid funds ???
Mutual funds are not only equity fund . There is lot of money in other category also .

3 years ago · Reply

Very good article eye opener.

3 years ago · Reply

Brilliant Analysis, Excellent Article Sir.
One more thing to look at is the last 7-8 months of performances of funds when Nifty went down to 7500 and bounced back to 12300. Clearly during these months, we saw how pharma, IT and Chemicals rallied.
How many fund managers actually foresee that and invested in these stocks to capture gains?
Particularly, the Multicap and Large-Midcap categories have the flexibility to invest in most of the rallied stocks?
This is where active management comes to the fore right. And this is how one produces alpha that improves the 5 or 10 year averages.
I felt the smaller funds did a great job of producing great returns compared to the large ones.

Deval Shah
3 years ago · Reply

Superb article! Thank you!

Just wanted to understand that on what basis the 4 categories was created? And further, shouldn’t Quant be a part of ‘The Performers’ category rather than ‘The Runners up’

    Anand Gupta
    3 years ago · Reply

    Good point. As I said, I took liberty there. Basis a) Overall Alpha. b) Easy readability.

    I too pondered on it. My reason a) Management change b) Little history with new management. Hence the call to put it in Runner up category. As I said in the article – might have future potential.

3 years ago · Reply

This data is related to a particular date, if possible do this analysis on rolling return and SIP return basis to get much better picture.

3 years ago · Reply

How did you arrive at the aggregate data?

3 years ago · Reply

Excellent analysis. Congratulations. Keep writing like this. Highly informative.

3 years ago · Reply

Dear Sir. Thank you so much for your hard work and really thankful to you for this article. But as an Lehman investor I have one query.

For example: Today X Fund house and X Scheme is giving good return and investor choose that fund for investment for 10 years. Intially 2 or 3 years fund gives a stable growth like 7 to 8 percent per annum. After that he or she continues sip for another 5 years . @ the end of 8 years investor see that the return is still not up to the mark. That moment for any investor is scary moment. In that case what is the tool or what is the measurements he or she has to take if he want to generate 10 to 12 Percent return over the period of 10 years or if he want to generate wealth in Mf Sip.

Kindly Advise.

    Anand Gupta
    3 years ago · Reply

    Did not understand what is “Lehman investor”.

    Hypothetical scenario – you are employed somewhere but not happy with your appraisal. Or you have an employee whose performance is not upto your expectation. How long will you wait before pulling the plug? Why should it be any different with investing? Do also consult your advisor.

3 years ago · Reply

Very impressed article with new Investment prospective.

Mukesh Chandra Jha
3 years ago · Reply

Good analysis on Alpha !

Mahantesh Patil
3 years ago · Reply

Hi, very insightful article.

Can you please share latest data-points as markets have run up a lot in last 2-3 month’s.

Thnx in advance.

[…] 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, […]

Leave a Reply

Your email address will not be published. Required fields are marked *