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.

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:

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.