LARGE CAP FUNDS VS NIFTY 50 FUNDS , A PERFORMANCE COMPARISONS SO FAR (DIRECT PLANS)

[michellelovesjay]

As promised, Here is comparison between Active funds and Passive funds. Funds compared at all Large cap funds direct plans vs UTI Nifty Index Direct, all growth.

This is no DD post, object of this post is not to say which funds are better but to see how many Active funds beat Index funds in performance.

I have taken SIP start date as 01/01/2014 as many funds direct plan starts in 2012-2013 years so this should serve as good start. I know tenure is short to judge MF performance but we have direct plans since 2012-13. Since all of us here invest is direct plans anyways so performance comparison of regular plan is moot here.

SIP end taken as 1st June 2019 and Fund exit date is taken (12/6/2020) the latest offered by Moneycontrol. This is done to reduce impact of exit load on returns of active funds. All Returns are SIP returns CAGR. Lets do this, Funds are arranged according to their (AUM)

UTI Index Fund - 4.38%

https://imgur.com/N0WFmyT

1. ICICI Blue Chip 5.36%

   https://imgur.com/mV3oIlk

2. SBI Bluechip 4.97%

   https://imgur.com/TEsJeq0

3. ABSL Frontline 3.65%

   https://imgur.com/wE43Wew

4. HDFC Top 100 2.89%

   https://imgur.com/QuBfhCE

5. Mirae Asset Large Cap 7.48% https://i.imgur.com/c6LPuSg.png
6. Axis Blue Chip 9.7% https://i.imgur.com/ugAhg7H.png
7. Nippon Large Cap 3.4% https://i.imgur.com/Msavisa.png
8. UTI Mastershare Unit 5% https://i.imgur.com/YvmR3kh.png
9. Franklin India bluechip 3.01% https://i.imgur.com/UYr74du.png
10. DSP Top 100 2.78% https://i.imgur.com/PQ3CzUv.png
11. Kotak Bluechip 5.61% https://i.imgur.com/x5YzUJU.png
12. BNP Paribas 7.03% https://i.imgur.com/ZvtOuiw.png
13. HSBC Large Cap 5% https://i.imgur.com/j1fucI1.png
14. JM Large Cap 5.41% https://i.imgur.com/hXHW8kz.png
15. L&T Large Cap 4.24% https://i.imgur.com/iuuCPVE.png
16. Canara Robecco Large Cap 8.53% https://i.imgur.com/NJVJREL.png
17. IDFC Large Cap 4.97% https://i.imgur.com/0IYXQvK.png
18. IDBI Top 100 4.52% https://i.imgur.com/VmRalbY.png
19. LIC Large Cap 5.13% https://i.imgur.com/qazrps6.png
20. PGIM Large Cap 4.61% https://i.imgur.com/SuGgyzm.png
21. Invesco Large Cap 6.21% https://i.imgur.com/6MmpV3Z.png
22. Edelweiss Large Cap 5.88% https://i.imgur.com/o6WQoji.png
23. India Bulls Blue Chip 4.96% https://i.imgur.com/rfpBJ6P.png

Funds below 100 Crore AUM are not taken here. 6 of 23 schemes under performes the index, which means 17/23 Scheme performs better than index by big small margins.

Please point out mistakes if any.

 

[crixus123]

@michellelovesjay Why have you taken 12th June as exit date? What's special about this date?

Even if you're doing SIP analysis, it's only applicable for investors who started investing on a particular date, and exited on 12th June 2020.

What's special about these dates?

This analysis is flawed because it only considers point to point returns, and has one single data point. A rolling-return analysis has its flaws (self-correlation), but it's still better than this.

Active funds generally sit on cash, so after a market crash, it can look worse for index funds who generally cannot have higher allocation to cash / cash-equivalents. What would it look like if the exit dates were chosen in late 2019-early 2020?

Secondly, if you feel point-to-point analysis is the way to go, how would these numbers look, since SEBI recategorization & rationalization came into effect since 2018?

Finally, the funds that have under-peformed (ABSL front line, Franklin bluechip, HDFC Top 100, DSP Top 100 etc.); were really good funds, sold by advisors in 2013-14. If you'd started your SIP back then, you'd be more likely to pick these funds, than the other ones.

This is something I've told you yesterday as well, but you seem to have missed it.

If you've faith in your active fund selection process, back test the selection process. See which funds you'd have picked in the past, then give these enough time to play out against the TRI over an extended period of time.

Problem with active funds isn't that they don't beat the index. They do. But as periods get longer, your favorite funds fall out of favor, with AUM growing higher and higher. So newer active funds would beat the index, but older ones would gradually fall out of radar (law of reversal to mean).

 

[resjudicata]

@crixus123 To add my 2 cents to this, even if these funds have outperformed Nifty over fixed point to point returns, it doesn't translate into investor returns.
Every 2 years the hottest fund to invest in keeps changing, and majority investors flock to the hottest fund of that time period.

HDFC Top 100 was the Go To fund for anyone investing in 2013-14, it started underperforming the index thereafter.

Mirae asset large cap fund was the hottest fund in 2017-18, and now it has been underperforming Nifty in past more than 1 year.

Axis funds are the hottest ones right now, and 2 years down the line they will likely meet the same fate, start underperforming the index.

Depending on when an investor is starting out, they would be very likely starting with the hottest fund of the time and then they will get lower than index returns in the next crash.

The beauty of index lies in this itself that people can expect average returns and not worry about the fund underperforming in the next crash

 

[utahorbust]

@resjudicata Do you see same for midcap funds? or for mid and small active funds are preferred?

 

[heliumskylark]

@utahorbust For midcap and smallcap segment, active funds are still the way to go. This is because there are so many trash companies outside the Top 50 that unless you are actively picking the good ones, you are most likely investing in 90% trash.

For large caps, active funds don't make sense since they have no choice but to hug the index after SEBI recategorization. They can only make small tweaks and you can't justify paying extra 1-2% expense ratio for that service. It's now a monumental task for large cap active funds to beat the index and the last couple of year's performance proves that.

 

[resjudicata]

@utahorbust Mid and smallcap always prefer active funds. Infact I am not even aware of a Mid or Small Index fund in India, is it there?
The reason - the advantage of Nifty is the disadvantage of Mid and Small indices. All the good companies keep moving up and move to the higher segment, while the trash keeps getting pushed down.
So all the rejects of Nifty next 50 are pushed down to Nifty Midcap 150, and rejects of Nifty Midcap 150 pushed down to Nifty Smallcap 250. Any company performing nicely will move out of the smallcap index thus ensuring that the index doesn't go up much.
I believe SBI and Axis small cap funds are the best to play this segment

 

[utahorbust]

@resjudicata Thanks for explaining.
I am planning to invest in Axis Midcap and SBI small cap.

 

[crixus123]

@resjudicata Agreed. Returns in the hand of an investor can be different from the fund's CAGR or SIP simulated returns, mostly due to behavioral aspects.

I'd talked about the Fidelity study into Peter Lynch's Magellan fund's investor returns, in the link I've shared above (fund return over 13 years ~29% p.a., investor returns on an average close to 7% p.a.).

Recently, PPFAS LTE published that after 7 years since 2013 NFO, they've a trailing CAGR of 15.5%. This is correct and can be verified by checking latest NAV.

But, investors who invested in NFO, and then continued investing (FreeFincal's Pattu, for example), have lower / higher returns than that, depending on what they'd invested in last 7 years, and by which amount.

For instance, Pattu has an XIRR of 11.66% from this fund despite regularly investing in it since NFO.

I've a 20%+ return from this, because I've invested more back in March / April, than what I normally invest in this fund.

But returns are not a fundamental attribute of a fund. The corpus Pattu would've build investing in this fund steadily for 7 years, might be much larger than mine.

 

[resjudicata]

@crixus123 Totally. One can just invest more in Passive funds when they are 25-30-40% down and earn much greater returns. This money can then be shifted back to Liquid funds when the market starts making new highs.
A simple 50-50% Index fund and Liquid fund balanced portfolio, with some transitions when market is at extremes works wonders

 

[resjudicata]

@crixus123 How is that possible?

How can the investor get a return of 7% when fund is giving a return of 28%?

I am a newbie so please explain

 

[crixus123]

@resjudicata Return is not a fundamental attribute of a fund. If you invest, you might have noticed that your investment returns change everyday, often wildly.

Similarly, return also depends on your investment patterns, amount you're investing on a given date etc.

when fund is giving a return of 28%?

When it says a fund has a CAGR of 28%, it means if you'd invested in the fund on day 1 of NFO, and never touched it (no redemption, no new investment), then after N years you'd have that returns.

If you do SIP in the same fund, your returns might be higher or lower.

But in this case, it was ~7%, because most likely some investors left at first sign of trouble, and jumped back in after the funds performed well over a year or two.

 

[resjudicata]

@crixus123 Ok thanks

 

[crimsonsaint]

@crixus123 When a fund starts out-performing,it gets more popular. With more funds to invest, the fund manager has no option but to buy the larger stocks, and slowly start mirror the index. Fund's outperformance starts to reduce, new favourites emerge, money gets reshuffled. Rinse and Repeat

Funds like HDFC and Franklin were "winners" for a long period of time, but eventually market cycles caught up

 

[resjudicata]

@crixus123 I agree. Shuffling in and out of funds is also market timing in a sense. By the way don't you mean reversion to the mean?

 

[resjudicata]

@crixus123 As AUM of index fund increases, won't the tracking error increase ?
Also, there's spread of about 0.7% among index funds with such low aum. Right now, uti might be doing good, but what's to say it won't be like Franklin in future

 

[resjudicata]

Quite the contrary I would say. Higher AUM for Index funds implies less tracking error. The fund can withstand emergency withdrawals in times of a crash. Index funds have the mandate to invest in their underlying index companies only, so there is almost none to little discretion in the hands of the fund manager

 

[crixus123]

@resjudicata It depends on the underlying index, and liquidity of stocks in that index.

Nifty stocks, especially the bigger companies in this index, are quite liquid.

In this case, having higher AUM, is a good thing.

SBI Nifty ETF is the biggest equity mutual fund in country, in terms of AUM (more than 60k+ Cr.), and it's been able to keep tracking error mostly under control. It receives ~1500 Cr. per month from EPFO (EPFO invests in equity through SBI Nifty ETF and SBI Sensex ETF).

Given the number of index funds & ETFs in Nifty Index space, it's easy to see a mere 1700 Cr. fund won't have any issue trading & growing its AUM.

Bigger AUM is a problem for active funds, because the fund manager might want to make some decisions, that would require him to sell or buy some securities, and move allocation up or down, compared to the index. This becomes problematic to execute when the AUM is huge.

Active fund manager has a mandate to generate alpha, which an index fund doesn't.

 

[resjudicata]

@crixus123 Thanks for the reply.

Regarding generating alpha, if the fund manager constructs a portfolio of stocks(say 30) which is subset of nifty 50, won't the fund have higher chance of beating the index?

If I have to choose nifty index fund, as long as it has reasonable aum and low tracking error, that should be fine, right? Is there any other things to look for?

 

[crixus123]

@resjudicata

if the fund manager constructs a portfolio of stocks(say 30) which is subset of nifty 50, won't the fund have higher chance of beating the index?

If it were so easy, why are fund houses hiring fund managers and arming them with equity research teams?

What if the ones you leave out suddenly starts zooming up?

Also "beating" is not an absolute thing. It depends on time period.

You can look at strategy indices, like Nifty Low Volatility 30 (ICICI has an ETF for this as well). This is a collection of 30 companies with low volatility among Nifty 100. Do these beat Nifty? Sometimes yes, at other times, no.

Is there any other things to look for?

Whole point of selecting Index fund is you stop worrying about these factors.

Freefincal has a video on this topic, that answers your queries.

 

[michellelovesjay]

@crixus123

Why have you taken 12th June as exit date? What's special about this date?
Even if you're doing SIP analysis, it's only applicable for investors who started investing on a particular date, and exited on 12th June 2020.
What's special about these dates?

Latest available date. You can take any date you want and make a new post.

This analysis is flawed because it only considers point to point returns, and has one single data point. A rolling-return analysis has its flaws (self-correlation), but it's still better than this.

I am curious too how this turns out. Do you have any real world data to make this post?

Active funds generally sit on cash, so after a market crash, it can look worse for index funds who generally cannot have higher allocation to cash / cash-equivalents. What would it look like if the exit dates were chosen in late 2019-early 2020?

Again. You can make a new post. Take exit date as 31st Jan. I am curious too how this data shows.

Secondly, if you feel point-to-point analysis is the way to go, how would these numbers look, since SEBI recategorization & rationalization came into effect since 2018?

I don’t know. This is all theory data. Point of this post is show active vs passive performance. How this will affect future performance w.r.t index, I don’t know but nor do you. Only time will tell.

Finally, the funds that have under-peformed (ABSL front line, Franklin bluechip, HDFC Top 100, DSP Top 100 etc.); were really good funds, sold by advisors in 2013-14. If you'd started your SIP back then, you'd be more likely to pick these funds, than the other ones.

Agreed. So were axis Mirae. In fact, Average person is most likely to for MF of their banks since you already have your account with bank. Four Five funds qualify in this category. SBI,HDFC, ICICI,Kotak and Axis. You can compare their performance with index above.

f you've faith in your active fund selection process, back test the selection process. See which funds you'd have picked in the past, then give these enough time to play out against the TRI over an extended period of time.

I know time period is short, comparing MF less than a decade doesn’t make sense but it is what we have as far as Dirext plans are concerned.

Problem with active funds isn't that they don't beat the index. They do. But as periods get longer, your favorite funds fall out of favor, with AUM growing higher and higher. So newer active funds would beat the index, but older ones would gradually fall out of radar (law of reversal to mean).

Not necessarily work in Indian context. That was my point Yesterday. Our Index is flawed. Doesn’t take fund much to beat it. Even many in top 10 funds beat index.This was my point all along.