Wednesday, February 15, 2017

Exiting a fund ?

This article is worth a read,

http://www.livemint.com/Money/rmrbriDOFeIM6MioiUr15M/Schemes-that-exited-Mint50.html

Looks like Axis Equity Fund and Axis Long Term Equity Fund were part of the exclusive club of the 50 curated (that's a nice word) funds and these erstwhile shining stars have now fallen from grace i.e. have become supernovas. Investors who used the Mint50 to narrow down funds and selected these two are now screwed, of course, they weren't as "diligent" as the ones who avoided these 2, but this case illustrates the difficultly of predicting the future path of a fund which inspite of all good intentions of the funds management is not a whole lot in their control, who knows these funds may start outperforming from now on!

Some gems from the article

To reduce the scheme’s volatility, the fund house has reduced AEF’s exposure to mid- and small-cap stocks. “Our strategy now is to have 75-80% of AEF’s corpus in large-cap companies and up to about 20% in mid- and small-sized companies,” said the fund official.

Lower volatility guarantees higher returns ?

We suggest that you stop systematic investment plans (SIPs) in these and exit once they complete the exit load (for AEF) and lock-in period (for ALTF).

That was a good to know.

I prefer to run the schemes keeping a benchmark index in mind. While I don’t hug the index, we shouldn’t veer so far from it that we take very active sector and company calls,” said the new fund manager and investors are going pay this closet indexer 2% to keep going.

Finally the futility of following these lists can be well understood through these extracts from
http://www.livemint.com/Money/Xm4PB3YH6ynE4CsrkWpzYN/Mint50-Shining-stars-from-the-mutual-fund-universe.html?li_source=LI&li_medium=news_rec

First the good news:

We checked out the past 5-year performances of the schemes that have been present in Mint50 before this year’s update. For short-term bonds, we checked their last year’s performance. Of the 50 schemes, five were passively managed. As their mandate is to mimic the stock market index, and not outperform it, we leave those out. Of the remaining, 76% of the schemes outperformed their category averages. There were 43 schemes in our basket that we could ascribe some commonly acceptable benchmark indices to. Of these schemes, 91% outperformed these benchmark indices.
But not good enough - we need to work harder.
This year’s changes are probably the biggest in recent years, on account of extended market volatility and changes in fund managers. 
How does the layman investor keep himself from getting jerked around by these lists. I recognize the authors of these articles have the best interests of investors in their hearts but could they educate investors like how people like John Bogle, Bill Bernstein did in the west ?


Tuesday, February 14, 2017

Finding Winners

As I was writing the previous post, a thought occurred, how are the top 4 Large-cap funds for the past 10 years doing in the past 5 years, Lets look at the top 4 for the last 5 years.

The first 2 funds didn't exist 10 years back, the performance of the 10 year toppers over the past 5 years is below


Birla Sun Life Frontline Equity Fund Growth16.96
HDFC Top 200 Fund Growth13.54
HDFC Equity Fund Growth
14.64
Uti Prim Opp Growth12.05

Looks highly likely that the top 4 for a 10 year period would be completely different from the 4 topper today - who are you going to bet on, let me know :)

Now the toppers for the past 3 years, none of them existed 5 years back except for the Kotak Select ..

The Kotak Select Focus Fund appears in both the 3 year and 5 year tables, lets see what its allocation looks  like. stocks & percentages look familar :-)


HDFC Bank Ltd 6.15
Reliance Industries Ltd4.14
ITC Ltd 4.11
UltraTech Cement Ltd 3.77
Hero MotoCorp Ltd 3.85
22.02

There is an index fund in the top 3, which is interesting.


Giant7.04
Large89.66
Medium0
Small3.3
This fund has a turnover of 101% according to Morningstar, does this imply its performance is random ?
We can also look at the performance of the 10 year toppers for the past 3 years, compare with 27% for the top 4.


Birla Sun Life Frontline Equity Fund Growth20.85
Uti Prim Opp Growth15.5
HDFC Top 20020.04
HDFC Top 20021.44

But if you look at the 80/20 Nifty/BSE Midcap , the 3 year performance lines up. but I am not sure if that's just chance, since the current asset allocation matches the 3 funds, it could be correlation, but I dont know the asset allocations of these funds over the last 3 years.


Number of YearsCAGR
1124.032858
1022.57338636
918.7843656
822.98029533
715.39238738
614.42460644
519.12184187
415.95908689
320.81033645
211.11579405
112.7407458
The moral is finding winners is hard. What is the common investor do do - investing in the Nifty Index doesn't cut it, Use an advisor with the right crystall ball ? 


Looking at large cap mutual fund holdings

Asset Allocation of Top Large Cap Mutual Funds

Lets compare the asset allocation of the top 4 large-cap mutual funds by performance with the Nifty Index. We had already looked at the morningstar data for allocation in terms of market capitalization.

Lets review the top holdings for a Nifty ETF

HDFC Bank LtdEquityBANKS8.5189
ITC LtdEquityCONSUMER NON DURABLES7.191
Housing Development Finance Corp LtdEquityFINANCE7.1047
Infosys LtdEquitySOFTWARE6.0953
Reliance Industries LtdEquityPETROLEUM PRODUCTS5.6818
ICICI Bank LtdEquityBANKS5.1427
Total39.7344

Now holdings for the top 4 funds over a 10year period are presented below, notice the handful of stocks that are repeated in every fund's holding in about similar percentages, how are you going to select a fund to invest in, perhaps you have an advisor with the crystal ball ? I am wondering if the 80/20 strategy of Nifty/Micap is the way to go and get a decent return without trying to predict the performance of individual managers ?


Birla Sunlife
ER 2.27%
HDFC Bank LtdEquityBANKS6.63969882.4387680751743775130/04/2007
Infosys LtdEquitySOFTWARE4.25766336.9266824172643167230/04/2005
ITC LtdEquityCONSUMER NON DURABLES3.6665456.529211411422114114231/01/2008
ICICI Bank LtdEquityBANKS3.59185345.978198772191987721931/10/2009
Tata Motors LtdEquityAUTO3.41215078.5599700236970023631/08/2013
Sum21.5671
Uti Prim Opp Growth
ER 2.31%HDFC Bank LtdEquityBANKS8.13373555.0142763000286200031/03/2012
Infosys LtdEquitySOFTWARE6.47362829.4443047000308700030/04/2008
IndusInd Bank LtdEquityBANKS4.84692118.4691692000173700030/04/2015
Hero MotoCorp LtdEquityAUTO3.98471741.6254900056250031/03/2012
Reliance Industries LtdEquityPETROLEUM PRODUCTS3.9171712.0381638000163800031/08/2012
Maruti Suzuki India LtdEquityAUTO3.51981538.39926100027000030/06/2012
22.742
HDFC Top 200 Gr
ER 2.25State Bank of IndiaEquityBANKS6.63428705.974334395003343950031/01/2003
HDFC Bank LtdEquityBANKS6.60318665.1776734681673468131/01/2010
ICICI Bank LtdEquityBANKS6.2878250.372306762303067623031/12/2005
Larsen & Toubro LtdEquityCONSTRUCTION PROJECT5.73377524.1915202552520255231/08/2006
Infosys LtdEquitySOFTWARE4.75466239.396719136671913631/08/2004
Reliance Industries LtdEquityPETROLEUM PRODUCTS3.85865063.6094844632484463231/03/2006
27.237
HDFC Equity Gr
ER 2.20ICICI Bank LtdEquityBANKS9.114615178.117564347185564071831/10/2009
State Bank of IndiaEquityBANKS9.01315008.886576488805764888031/01/2003
Larsen & Toubro LtdEquityCONSTRUCTION PROJECT7.543512561.8318685795868579531/05/2012
Infosys LtdEquitySOFTWARE6.006610002.49107715811077158131/10/2008
Maruti Suzuki India LtdEquityAUTO5.1348549.481450478145047831/03/2013
HDFC Bank LtdEquityBANKS4.52547536.0025857072585707231/07/2013
Tata Steel LtdEquityFERROUS METALS4.43067378.013159335131593351331/01/2010
27.6401