Mutual Fund | Portfolio Yoga

Total Returns – The Better Benchmark

Once in a way, one comes across a Mutual Fund that decides to take the bull by the horns when it comes to transparency. Mutual fund are products that are sold on the basis of past performance – the better the fund performs against its peers and the benchmark it targets, the easier to sell.

While active management (to which we are a votary of) is seen as a failure in countries such as United States, in India, its a thriving industry thanks to funds that are able to beat the Indices they follow by a margin that is large to even visualize.

Fore example, lets take the best fund in the Multi Cap space out there – ICICI Prudential Value Discovery Fund. This fund is the top performing fund among Multi Cap funds with 10 year CAGR returns of 17.80% versus its benchmark, the BSE 500 which has generated 9.32%.

BSE 500 index represents nearly 93% of the total market capitalization on BSE. NIFTY 500 Index represents about 95.2% of the free float market capitalization of the stocks listed on NSE.

But growth funds when bench-marked against the Index do not really give the accurate comparison for growth funds have the luxury of Dividends. When companies pay out Dividends, the stock price gets adjusted (theoretically) to provide for the pay-out.

But unless it a extra-ordinary dividend (wherein Dividend is greater than 10% of the stock price), the price of the stock is adjusted as it would have been in case of Bonus or Split. Most companies though give out Ordinary Dividends and this is simply deducted from the stock price without any adjustment.

Let me give a example of how this works.

Assume a Index of 50 stocks and having a value of 1000. For sake of simplicity, lets assume that on a single day (ex-date), all 50 stocks go ex-dividend with each company having given out exactly 2% of their stock price as Dividend.

All things being equal on this date, all stocks will open 2% lower and in turn the Index will see a 2% decline. But this decline is not real as the investor receives the amount equivalent and hence not necessarily a loss. A growth mutual fund on the other hand just adds this to income.

So, while the Index would have fallen by 2%, the fund would have remained steady. This would mean that the fund is now out-performing the Index by a measure of 2%. The fund manager with this new money can re-invest (remember, he gets the Dividend payout) into the same stocks and hence compounding the returns over time.

Enter Total Returns Index

The above anomaly can give rise to funds that aren’t really market beaters being able to claim to be better than the Index when it may not truly be the case. Total Returns Index is a virtual Index wherein the Index manager is assumed to have re-invested the dividends back into the same shares. In the above example, this would mean the fund would take the 2% dividend paid out and re-invest bring the fund value back to 1000.

How much difference can this make? Well, take a look at the chart below which plots Nifty 500 with Nifty 500 Total Returns Index

The difference over time as the chart depicts above can be phenomenal. Not surprisingly then most funds prefer to benchmark against the Index rather than Total Returns.

Of course, an added impenitent to measuring their performance against Total Returns was the fact that NSE till very recently gave out only data for Nifty 50 Total Returns. The only fund to have bench-marked itself against Total Returns was Quantum Long Term Equity Fund.

But as friend in the Industry said, “their name doesn’t (really) ring a bell in the AMC space”.

Other than Quantum, other funds have for long given it a pass. This even as many have generated returns better than Total Returns Index (which any-way cannot be invested into given lack of Instruments).

This seems to be changing. On 23rd August 2017, DSP Blackrock has taken the first step to benchmark its funds against Total Returns Index. This is a step in the right direction and DSP needs to be applauded for taking the Initiative.

While Quantum has always been the leader, its nice to see a fund house that is several times larger than Quantum take similar initiatives. We can only hope that other larger funds now follow suit and start measuring themselves against Total Return Indices of their respective benchmarks.

The last few decades have belonged to active management but nothing remains static and with growing fund size and better participation in equities, its only the best in business who shall thrive.

Chasing Performance & Behavior Gap

When Gold, especially in form of Jewelry is bought, its not bought by calculating the CAGR returns it shall provide over the next 3 / 5 years. When one buys a home for his own use, he is not calculating how many times it can become in the next few decades. But not calculating really mean that we are ignorant of returns?

Every month hundreds of vehicles are sold despite irrefutable evidence of how by just a few years it will be worth closer to scrap than any vehicle. Aren’t the buyers conscious of this fact?

Value Investors claim to buy good business choosing only businesses that keeps generating consistent returns for their shareholders. But do all good businesses make for good investments?

From the religion we profess to the acts we commit, everything is based on a some philosophy we agree with and one we would like to follow. Investing should be no different, or is it?

Last weekend, I raised a question on Twitter as to what drives Investors when it comes to Mutual Funds. The results were a tad of a surprise to me.

What is your Primary Criteria when investing in a Mutual Fund / PMS?

— Prashanth (@Prashanth_Krish) August 5, 2017

Returns are important and the very reason we finally invest, but Returns are post-ante – something we really have no control with. What we have control over a larger degree is the Philosophy that is followed by the fund house and how well we believe in them.

The reason for a investor to bet on a Philosophy than a Star Fund Manager or even Returns is that without there being stead fast belief, one can never be comfortable as to whether the fund continues to remain one that is worth staying invested or one from which it makes sense to move on.

In the 2000 bull market, one person who stayed away from Participation was Warren Buffett. For a time, he was heavily wrong as market broke every rule that seemed to bind it in the past as a new set of investors made bets that paid off immensely.

Such was the divergence that when the Nasdaq Composite was touching new all time highs, the Dow was a very close to its own All time High, the stock price of Berkshire Hathway was down 50% from its peak.

Rare would be the man who held Berkshire Hathway shares in those days while ignoring the hot stocks that had turned ordinary Joe’s into multi millionaires. “GREEN LIGHTS” Business Week proclaimed. “The stock market’s rise is a accurate reflection of the growing strength of the new economy. Productivity growth, although understated by official statistics, is raising as companies learn to use technology to cut costs, a necessity for competing in global markets”. (Quote sourced from the book, Bull: A History of the Boom & Bust, 1982 – 2004).

Its one thing to believe in a philosophy and quite another to be able to take the hits that come along with it. As Momentum Traders, we Invest / Trade without bothering about the companies in which we put our monies to work. The philosophy that guides us is historical evidence of cycles and belief that as long as we are trading with the larger trend, we shall come out better than where we started from.

From the outside, all Mutual Funds are the same – all of them try to gather as much of assets as possible and try to maximize gains for their investors, or are they different animals?

The last one year has been phenomenal in the markets with Nifty 50 up by 17.72% and Nifty Next 50 up 27.00%. Based on above data points, would you invest in a fund that has under-performed both the Indices with its 1 Year Return being just 15.39%. What about another fund that benchmarks itself to Nifty 500 which over the last one year has been up 17.30% verus 21% return by the Benchmark it follows?

The fund that is up 17.72% is Quantum Long Term Equity Plan while the fund that generated 17.30% return is Parag Parikh Long Term Value Fund.

The Behavior Gap

In 2012, Carl Richards a Certified Financial Planner came out with a book titled – The Behavior Gap – Simple ways to Stop Doing Dumb things with Money wherein he coined the term, “behavior gap” to explain the reason as to why Investors in Mutual Funds under-perform the funds they are invested into.

Behavioral Gap is not academic. As the following chart from Axis Mutual Fund shows, this is as real as it comes.

As can be seen, the difference can be substantial but without understanding the source of where this gap comes from, its easy to fall prey.

Momentum Chasing is Bad

Being a Momentum Trader, this is a tough to say but true when it comes to Mutual Funds. Chasing Momentum can easily land you in trouble for unlike stocks where Momentum Investing has great value, in funds, this can easily backfire.

Currently the best performing fund among Large Caps is the JM Core 11 fund (Best performing fund based on 3 year look back) and yet its AUM is just 32 Crores. The reason is not hard to fathom if one were to look at the performance of its funds with a longer track record. JM Equity Fund for example is the worst performing fund over the last 10 years (Large Cap) with return on Investment being a pitiable 4.03%. These days, you can get better return on Investment than that on your Saving Account.

Every fund worth its name claims to have a philosophy that is said to ensure better returns for its investors. Its quite another matter as to how many funds really follow what they preach.

Motilal Oswal Mutual Fund has a Philosophy of “Buy Right, Sit Tight”. Motilal Oswal MOSt Focused 25 Fund is the 3rd best fund among all Large Caps. Their 3 year return has been 19.75% but is the Return based on following of the Principal they profess?

The fund has a Turnover of 86% which seems to suggest that the Portfolio is going through a lot of churn. With markets flying, this is providing returns better than average, but what when the Tide goes down?

A competing fund (Large Cap focused with similar AUM) one of whose core philosophy has been to keeping costs as low as possible has generated a return of 13.75% over the same period. Turnover of the fund – 20%.

Does the above example mean that Higher Turnover is better or should one care less about Turnover as long as Results are above expectations?

While there is data lacking to reveal whether a higher turnover is better or worse, the following is evidence from United States where one has more data points to get a better perspective

Source: The Perils of Portfolio Turnover by David Blanchett.

One of the under-performing funds these days is Parag Parikh Long Term Value Fund. This fund philosophy is simply to Buy and Hold for the long term stocks that they believe are Value (Buying securities at a discount to intrinsic value). The fund has a Turnover Ratio of just 10% but a 3 year return of just 14.73% versus the best fund among Multicap funds – Franklin India High Growth Companies Fund which has given a return of 20.63% (Turnover Ratio being 44%).

Once again, the fund house in question has a philosophy of investing across Value and Growth and for now seems to have delivered way better than pure Value fund. But is this is a good model for eternity?

The Prime Objective for investing in Mutual Funds is the ability to hire a fund manager who believes in values we understand are willing to bet upon. Comparing one fund to another purely based on short term returns hence makes little sense and yet going by the Inflow / Outflow Mutual Funds data shows, this is what is happening with Investors chasing the best funds of the day.

Momentum Investing in Stocks on the other hand actually offers better Risk to Return as the upside is unlimited versus limited upside for even the best of funds. Strategies that work in one market needn’t really work in another and trying to force it can only result in broken goals and un-necessary disappointment .

“All I want to know is where I’m going to die so I’ll never go there.” – Anonymous

Climbing Trees & The Benefit to Cost Ratio

One of the most abundant trees once upon a time in Bangalore as in many other cities across the south used to be the Coconut tree. Thanks to the fact that literally every part of it is useful, the tree is also called a Kalpavrisksha. Growth of city has meant a rise in number of trees being cut down to save on space though even today it’s not un-usual to find such trees in almost any old area across the town. In fact, at my place we have one that has been yielding fruits for decades.

While most trees can be easily climbed, this is not the case with the Coconut Tree. With a single straight stem and no real grips along the way other than for the groves formed by leaves that have long since gone, climbing requires a certain kind of skill-set.

A coconut tree climber today charges 300 – 400 per tree for a single climb. When I was young, I used to climb trees and yet, never have I tried to climb a coconut tree to pluck the fruits. The risk of falling is just too great for the savings it affords.

Manoj Nagpal tweeted the following story yesterday which seems to imply that investors who try to save pennies by going direct take much bigger risks.

My First Twitter Short Story
Folk Tale of Kerala: Swamy and Coconut Tree
Are u Swamy trying to buy Direct Mutual Funds? pic.twitter.com/lb6fgd5gVn

— Nagpal Manoj (@NagpalManoj) August 2, 2017

While I disagree with the premise of the story (the guy who climbs the tree himself is not a Direct Mutual Fund Investor, rather he is an Entrepreneur who takes the risk of plucking what he assumes are low lying fruits), it’s true that if you aren’t knowledgeable about finance, it’s better to have an advisor to guide.

In the United States, almost all states now include personal finance in their K–12 standards. Of course, on the other hand household debt is hitting new peaks showcasing that education while helpful isn’t enough to stop us from taking stupid decisions.

In India, I don’t think any school offers classes on how to manage finances. How many students passing out of colleges I wonder can really differentiate between Fixed Deposit and Recurring Deposit let alone the difference between CAGR and XIRR.

A booming stock market along with aggressive marketing by AMFI has meant strong inflows into Mutual Funds. Much of the inflow into Equity funds come in through Distributors who are paid for both brining the client by way of Upfront commission but also are paid through the length of the time the client remains on-board by way of trailing commission.

It is no one’s argument that we don’t need advisors. Most clients require advice on how to organize their investments better. But does that require one to pay a fee in perpetuity regardless of whether advice given has been continuous in nature or was a one off?

For a long period of time, Stock Brokers also doubled up as Advisors given the lack of any other decent alternative. This also meant that pricing was high with investors being charged as a percentage of their investments.

But passage of time has meant that there now exist professional stock advisors who will for a fixed fee guide you on the opportunities that are available. Once a stock broker is reduced to just being an executor, the fee started to fall to the extent that a few discount broker’s today offer to execute your orders without taking a paisa in commission.

Flat Fee based advisory hasn’t really taken off anywhere across the world. The blame though lies on our cognitive biases than regulatory hurdles.

The Power of “Free”

Almost every distributor claims that his services are for free versus the fee based advisor who asks you to upfront a certain sum of money before he would even initiate the process of helping you invest in the right asset classes.

While most of us presume that nothing comes free and there is always a catch, we justify the ignorance by assuming that nothing is anyway being paid out of my pocket. The distributor is anyways compensated by the fund house, so why should I bother.

In a bull market, fees hardly matter given the returns the fund could deliver. But when you are saving for causes such as your Retirement or your children’s education that is a couple of decades away, this small difference can really add up over time.

But the biggest reason for one to either choose a Fee based Advisor or Do it yourself is not just to save money.

“The great thing about reading is that it broadens your life” ― George R.R. Martin

While we spend our whole lives trying to earn more, isn’t it also important to learn how to deploy the same better. Mistakes happen regardless of whether it’s a decision taken by you or a decision taken by someone you paid. But while you can always learn from your mistakes, the same cannot be really said when the mistake was committed by someone else but impacted you. You then become Collateral Damage.

While we fear that we may stumble, as Alfred Pennyworth says to Bruce Wayne (Batman) – Why do we fall sir? So that we can learn to pick ourselves up. Your Distributor would love for you to be uninformed for the more uninformed you are, lesser the chances of asking tough questions.

Start with simple concepts and soon you shall find that it’s not all that tough and those complex sounding jargon aren’t really as complex as it seemed from the outside. Even if you were to take the help of an advisor, wouldn’t it be important for you to understand whether he is helping you or helping himself?

To conclude, it all boils down to whether you will take want to take responsibility for the choices you make or hope someone makes the choices for you. And No, Investing in Mutual Funds isn’t a full time job that you would rather outsource.

“The only real mistake is the one from which we learn nothing.”

~John Powell~

Does Investing all at Once makes sense?

It was nearly 10 years ago that I received a big Cheque thanks to selling off a asset that had suddenly appreciated in value much beyond what I had imagined. What I did with that was a kind of turning point (in a bad way) in my life. But this post is not about the stupidity I did, its about whether you can do better when you receive a big cheque that could really change your life.

Assume for instance you sold off a property and now have a sizeable sum of money. What should you do with it and how do you go investing the same?

Once you are in the 30% tax bracket, any investments should be seen in the light of how that post tax return compares to other options available.

Equity Investing is all the rage and if you are looking at wealth generation for the long term (or even for goals that don’t require money for a decade or more), its a good bet. But how should you proceed with the money you received?

Should you for instance just select a few funds (if you are into Mutual Funds) and invest it all or should you drip the money into the same funds over time.

Vanguard in 2015 did a study of whether it makes sense to invest all at once or invest over time (Assumption being that you have the full money available at the start). This was conducted across three markets – United States, Canada and Australia.

The conclusion;

Our analysis indicates that investing immediately has historically provided better portfolio returns on average than temporarily holding cash

The conclusion though isn’t conclusive since only 67% of time does lump sum out-perform sipping the same money over the next 12 months. In 33% of the time, it was better to invest over time rather than invest all at once.

So, how would such a idea fare in the Indian Markets?

For the test, I used Nifty 50 (Spot) data starting from 1990 to date. When money was invested over time, the assumption was this was held in Cash and did not yield any returns. But in reality, this could have been easily invested in funds such as Ultra Short Term Bond funds with monthly withdrawal to feed the equity.

Here are two charts to provide a birds eye view of which option is better.

The above charts plots multiple things. We plot the instances where SIP made sense. This is represented by drawing a Vertical Line – the colors denote the length of the SIP in Question. On the Secondary Axis we have the Sensex PE chart plotted.

The visual represents whether investing in one shot gave a better return than when invested over time (invested over 12 / 24 / 36 / 48 / 60 months). Blank are is when lump sum made absolute sense while lines were when SIP’s of a certain period made sense.

The above chart can also be synthesized in a data table which I present below.

How to read this Table?

The table beside this text represents the % of time lump sum investing beat investing over time. Longer the period of SIP, higher the probability of success using the lump sum mode.

While regardless of market conditions and valuation, investing all at once can make sense if you are looking for a investment period greater than 20 years, as the charts above showcase, looking at Valuations can be advantageous to your financial well being.

The Vanguard Study: Invest now or temporarily hold your cash?

The Future Is Not a Continuation of the Present

Mutual funds are on a roll. With Gross inflow of 23,000 Crores and a Net Inflow of 15,000, collections have been never better for the Industry. One key reason for the growth has been the spectacular returns by few funds in the recent past.

Recently, Economic Times report wrote about 5 funds that doubled within last 3 years (Source). Fintech companies are sprouting up left, right and centre promising to help you achieve your dreams. AMFI has been on a roll in recent times advertising even at high profile events such as the recently concluded Champions Trophy that Mutual Funds are the way to go.

And finally, Markets have been exceptionally bullish come hell or high water. With the Real Estate sector seeing reducing interest thanks to both slowing of growth as well as prices reaching way out of reality, this move to Equities is not surprising.

While the Industry is growing strongly, that hasn’t really translated into better options for Investors. With SEBI mandating a 50 Crore Networth for starting a fund, the barrier to entry is pretty high. This has translated into funds having nothing to worry. Most funds seem happy to charge as much as the regulator allows them to.

Funds with 50 Crore in Assets charges the same as one that manages 10,000 Crores. But if a fund can deliver 30% return post the charges, why complain say the naysayers.

I am not a skeptic of investing in equity or even of the fact that “Active Management” is better than passive, especially in a country such as our’s where there are just too many opportunities that big firms cannot easily take advantage of (Liquidity concerns for example).

Having said that, Active Investing not just requires one to be pro-active in markets but also have a strong philosophy which one uses to invest and the ability to stick to it come rain or shine. Since majority of us aren’t as clued it as professionals, it makes ample sense to give the money to some one who has both the time and the inclination.

A recently released advertisement by Motilal Oswal makes this amply clear

While Momentum seems a bad word to use in the world of Mutual Funds, the fact of the matter is that money chases performance. Better the performance, stronger is the growth in its Assets under Management. Larger the assets, more the Income – there couldn’t be a better incentive for everyone concerned, except of course the fund investors.

When money chases stocks, it results in abnormal valuations but as Chuck Prince once said,

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance.

Couple of months back, Parag Parikh Mutual Fund provided this table to give a context to how sharply have valuations gone in a short period of time.

Some of these companies were maybe trading at valuations below what it should have commanded, but overall, the valuation of today seems to suggest that India is Shining with astounding growth opportunities.

Couple of days back, I posted this chart outling returns provided by Mutual Funds for the period between 2008 to 2016. By using 2008, I was literally asking for trouble – after-all, I couldn’t have chosen a worse starting period. The objective of the exercise was not to show that Mutual Funds were bad but give a view point that just because one professes long term doesn’t mean long term results have to be great regardless of when one made a entry.

These funds are the best among all funds that were open in 2007 (December 31) and were still active on 31st December 2016.

The list is dominated by funds that targeted Mid and Small Cap stocks where much of the action is these days.

So much money has been chasing performance that DSP BlackRock in February 2017 decided to suspend fresh transactions in Micro Cap Fund.

Nifty Mid Cap 100 Price Earnings ratio today is trading at a value higher than what it traded at its peak in 2008.

In Technical Analysis, when one uses a Oscillator, one is forewarned that just because a stock reaches a over-bought territory doesn’t make it a sell candidate.,

In fact, the first sign of over-bought could be a contra-buy for much of the crowd is yet to pile on to the instrument. Its not the first staw that broke the camel’s back but the last straw.

Similarly, higher valuations alone doesn’t mean a sell. But if your Networth is overly exposed to equities (Direct / In-Direct), it makes ample sense to trim a bit of the profits rather than let all of it run.

When investors pile into performing funds without understanding the context of those returns, they are looking for trouble and disappointment. From its peak in 2000 to its peak in 2008 (8 years), Reliance Growth Fund gave a return of 5000%.

Along with Reliance Vision Fund, these were the funds with the maximum collection of assets (HDFC Top 200 being one of the other funds with similar returns during those times). But the returns over the next 8 years has been nothing similar.

Of course, Markets haven’t gone up so much you may argue and you are right. But, the question is, what is the expectation of the client who made those investments in the year 2007 / 2008? Were they expecting 4.79% return (Reliance Vision Fund) or 6.52% (Reliance Growth Fund) 8.42% (HDFC Top 200 Fund).

Couple of days back, I sat and went through more than a Dozen websites that hawk Mutual Funds. While most claim their thought process is different and hence will make a difference, when it came to advise, it was Equity all the way.

This regardless of whether I put in a time frame of 5 or 30 years. One site advised a Asset Allocation of 85:15 for my retirement. Nothing wrong except that it also gave out a 18% CAGR over the whole period. I have no clue whether 18% is low or high since we have no clue about the future inflation (other than just to guess), but by giving out a number that is way high compared to any other investment at the current juncture, its setting a very high expectation in me.

By early 2009, the current best fund – DSP BlackRock Micro Cap Fund – had gone down 75% from its peak of 2008. In other words, if the value of your investment had reached 1 Lakh in Jan 2008, by March 2009 this was down to 25,000. It requires a really strong mentality to not just hold but buy into the same (which is what SIP is all about).

Job losses was less heard of even during the peak of the financial crisis in 2008. Currently, we hear of Job Losses even as markets scale new highs. The next crash will not be similar to 2008 or even the less talked about and less known 2000 crash.

Its time you set the agenda rather than follow the agenda of some one who is more interested in how much he gains versus the risk he is exposing you to.

Of Labels and Stereotypes

Like it or not, we are all labelled one way or the other – from the Religion we profess to the Country in which we happen to be born among many others. For South Indians, anyone born in the North is a Bihari regardless of whether he is from Bihar or from Rajasthan. In the inverse, anyone south of the Vindyas is regarded as a Madarassi once again overlooking the vastness of the land that is there.

In Investments, we are believers in labels. We can either be Value Investors / Momentum Traders depending on which way the wind is blowing though there are guys (including me) who are die-hard fans of one style versus the other and would rather defend to death our ideology than just be open to whatever works.

Whatever Works. Isn’t that the key?

Chris Gayle you may claim has no style when you compare him to say Rahul Dravid. But in the format of 20-20, the key wasn’t whether he had style or not. It was whether he delivered. Its as simple as that.

In the Universe of Mutual Funds, funds are labelled according to their Portfolio into either Large Cap / Multi-Cap / Mid Cap and the Small Cap Universe. But these labels aren’t permanent for as the portfolio changes shape, so do the labels.

Quantum Long Term fund for example was long labelled as a Multi Cap fund but now is seen and categorized as a Large Cap fund. The fund is currently the best performing fund among Large Caps with a 10 year return of 14.63%. But what if the fund was not labelled and was compared with every other fund with a 10 year track record. Would it still be the leader?

14.63% Compounded Growth over 10 years is no small return and yet it would be placed in the 18th position among all funds (Excluding Sector Funds). Wait a minute you would say, aren’t we ignoring the Risk of these funds verus the lower risk of Quantum?

Thankfully we don’t need to speculate for we have data. For this exercise, I select 2 other funds. The first is IDFC Premier Equity Fund which is the best fund among all Equity Funds over the last 10 years. The second fund is ICICI Prudential Value Discovery Fund, the best fund among “MultiCap” funds of the last 10 years.

Since a picture says a thousand words, here is a chart showcasing the draw-downs suffered by these funds against one another.

Absent labels, could you really identify which fund is a Large Cap Fund, which one is a Mid Cap fund and which one is a Multi Cap one?

When shit hits the fan so as to speak, there isn’t much difference between a good mid cap stock and a great large cap one. Every starts to behave like a small cap and the above chart is just showcasing how close they are when it comes to risks taken.

Now, lets look at the cumulative returns (2006 to date) generated by these funds,

At no point of time has IDFC been even challenged in terms of leadership in returns. Quantum and ICICI were competing with each other before ICICI took off in the “Modi Magic” bull market with Quantum constrained to play catch up.

If I were to have not given you knowledge of the fund names or the labels they carry, which one would you go out and invest today?

Parag Parikh Mutual Fund was launched as a kind of Value Fund. But since fund research houses don’t have a label for Value, its closeted with other Multi Cap fund. The fund is really unique in many ways. For instance its well known exposure to stocks listed in US to the extent that its biggest holding is Alphabet Inc (Google).

Recent portfolio also shows its into Arbitrage (Futures versus Cash) with nearly 8% of the portfolio being totally hedged. It also has around 16% of its AUM in cash.

Since the fund has been launched only in 2013, we really don’t have a track record long enough to compare with other funds. But fact of the matter is that while the span maybe short, its performance hasn’t been great even in that short spell.

With a 3 year CAGR return of 15.66%, its return is half the Category Leader, Motilal Oswal MOSt Focused Multicap 35 Fund. But when it comes to draw-downs, the difference is not too big to suggest that the Multicap 35 fund is taking way higher risk than this fund which could account for the difference in returns.

2 Funds. Which one would you Buy? pic.twitter.com/qwRxYT8xft

— Prashanth (@Prashanth_Krish) May 21, 2017

Without the label of being a “Value Fund” , would you be a investor in the fund? To help you make a better call, here is what Warren Buffett said recently about this funds largest holding

Buffett said he had failed to see Alphabet’s growth potential, despite being a user of the online search giant.

One’s man’s trash is another man’s treasure goes a saying. But if all you have is data from the past, shouldn’t that be the only criteria to judge a fund / investment.

Adios!

Mutual Funds or ETF

The topic is something I have written about earlier but given the nature of the market, it keeps propping up as one or the other side unearths what seems to be new evidence which show why one is better than the other. In the United States, its more or less settled that Active funds cannot beat simple ETF’s and this is not just limited to Mutual funds as the bet by Warren Buffett is showcasing.

Ravi Dasika, Co-Founder, Tavaga.com wrote a post on Medium trying to show why the viewpoint of Sharad Singh, Founder and CEO of Invezta.com wherein it was claimed that 95% of all funds beat ETF’s was simply and absolutely wrong. Before we go any further, a word on these two sites. Tavaga.com is a site founded to provide investors a way to build portfolio’s using simple ETF’s while Invezta.com is a site that provides investors with the ability to invest in Mutual Funds Direct (other sites such as FundsIndia for example are sites that provide avenue to invest via Regular schemes which are more expensive ,0.5% to 1.25% approx depending on fund.)

In other words, they offer their customers a choice that is pretty much opposite (Passive vs Active) and even while the total pie of investments that is coming into the equity markets is pretty high, like in the United States, at some point we shall see some sort of cannibalization.

Given the background, lets explore what Sharad Singh wrote at Business Today in his post More than 90% active mutual funds beat the indices. There is still time for ETFs. I would suggest you read the article though the conclusion (as would be evident from the headline itself) was that ETF’s were inferior to active Mutual Funds.

To make a case for Active, Sharad combined ETF’s and Index funds on one side and all Mutual funds on the other. While Index funds are supposedly passive and theoretically should move like the Index, it rarely does so thanks to Tracking Errors that dominate. Either way, Sharad takes a total of 17 ETF’s. I on the other hand could find a total of 24 funds (18 Index, 6 ETF’s) with a minimum track record of 5 years.

Here is the list with returns

As the data evidently shows, ETF’s handsomely beat Index Funds some of which can be attributed to fees (IDBI Nifty Index fund for example charges 1.74% as its Expense) while others maybe due to the churn needed to continually adjust for the inflows / outflows. While even ETF’s face that issue, due to the size of the Creation Unit being large, I believe that impact is much lower in their case.

Now, lets look at Mutual Funds (and since Direct funds are still a very small portion of Retail Investors, I shall use Regular)

On an average, Mutual funds have indeed outperformed both Index Funds and ETF’s by a margin. But what data misses is the fact that this data is skewed in two ways.

One, the starting point of the 5 year analysis starts right after the bear market of 2011. A fund which had a higher beta than the Index would surely outperform given the overall bullishness in the period.

Second, the 10 year returns are of funds that continue to exist. Any fund that was closed / merged would be missed propping up the returns higher (since its generally weak under-performing funds that find themselves under the axe).

Even more important point to note is that if you had invested in any of the funds on the left hand side, you would have either kept in line with the ETF or under performed. On the other hand, investing in funds on the right hand side should have given you a return much higher than what you could have got through ETF’s / Index funds. But either way, its not a 95:5 split but more of a 50:50 (Coin Toss). (Errata: Only 22% of funds have under-performed not 50%. Apologies).

Do note that while we compare all the funds against Nifty 50, its actually a wrong way to compare since many of the above funds have pretty large investments in stocks outside the Nifty 50. On the other hand, if you were to invest equally into both Nifty 50 and Nifty Next 50, you would more or less get the entire population. But since we have just 2 ETF’s with minuscule AUM’s, it would not be a fair comparison.

Over the last 5 years, Nifty Next 50 has given a return of 20.24% showcasing where and how the extra returns by the funds above maybe been garnered. One can only hope that we see more launches to track indexes such as these making it easy for potential investors to invest in a ratio that has a very high probability of beating the best of the funds (which are recognized only in hindsight).

If you were looking at investing for the long term, a good mix of Nifty 50 and Nifty Next 50 on the equity side should beat the shit out the majority of funds 10 / 20 years from now, that is unless you know which fund to buy and forget for the next decade.

Finally, the goal of investing is to ensure that our Goals are met. The road you prefer is left to you and while most of us will still arrive at our destinations, the time taken maybe different due to the different roads we took to reach.

Enter Total Returns Index

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The Behavior Gap

Momentum Chasing is Bad

Source: The Perils of Portfolio Turnover by David Blanchett.

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The Power of “Free”

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