Last week, Securities and Exchange Board of India (Sebi)
chairman U.K. Sinha, speaking at the Confederation of Indian Industry Mutual
Fund Summit, said something that took many of us by surprise. It is not often
that a capital markets regulator speaks about the performance of products, the
lack of it and how the regulator was going to deal with it. Regulators largely
stay with removing systemic risk and the risk of fraud, leaving investors to
deal with market risk on their own. Why would Sinha, then, point to nine fund
houses that were beaten by their own benchmarks over the last three years and
promise to take this up with the companies? Is this the start of micro-managed
regulation?
I doubt that Sinha intends to look over the fund houses’
shoulders as they click “buy” and “sell”, but I think he was making a broader
point and telling investors to look at benchmarks as a key determinant to
evaluate fund house performance. Few investors understand the relevance of a
benchmark and look at absolute returns on their money. For example, a few years
ago, a fund house sought to take advantage of this ignorance and advertised in
large hoardings that its schemes had returned 100% over the year. What
investors did not understand is that the underlying index—the Nifty or the
Sensex—went up by more than 100% over the year, lifting overall returns. The
truth is that that fund house had schemes that had underperformed the benchmark
while giving 100% returns! The logic of using an actively managed mutual fund
route to investing is to be able to beat the benchmark. Just investing in an
index fund or an exchange-traded fund will get you lower costs and average
market returns. The reason you pay the higher management fees and take on more
risk is so that the fund manager can get you benchmark-plus returns. When that
does not happen investors must switch fund houses and schemes. Investors need
to be educated about this and what better road than to get the media to report
on what seems to be, an outrageous statement—Sebi will monitor performance.
The next question, of course, is: which are these nine fund
houses that earned the ire of the regulator? Sebi did not release this list,
nor do we have the methodology used to filter these out, but most of the names
are not difficult to find—they make up the bottom rank of all league tables. I
asked Value Research to crunch numbers for me and a special thanks to Charul
Sharma for turning this data around so fast. The fund houses that have seen all
of their equity funds underperform the benchmark over a three-year period are
JM Financial, Baroda Pioneer, Deutsche and Edelweiss. JM has five, Deutsche
four, Baroda Pioneer two equity schemes and Edelweiss one equity scheme in
their equity portfolio that have all underperformed their own chosen benchmark.
Over a five-year period, there are four fund houses with no funds that beat the
benchmark and these are LIC Nomura, Morgan Stanley, JM Financial and Escorts.
Look out for a more detailed list of fund houses later this week in these
pages.
As an investor, why should you care about overall fund house
performance, and not worry about just the scheme that you own? A fund house
with 75-80% of its schemes outperforming the benchmark points to an asset
manager with good investment hygiene and good systems. Fund houses have used
the new fund offer route in the past to garner money and this done, have tended
to ignore most schemes, focusing only on the flagship. An overall attitude of
we-beat-the-benchmark points to a well-run fund house. The funds that have all
their equity funds outperform the benchmark over a three-year period are AIG
Global, Canara Robeco, Fidelity (before it was sold), HDFC, Mirae and Quantum.
In the over-80% outperforming league table are fund houses such as DSP
BlackRock, Franklin Templeton and ICICI Prudential.
If you hold units in any equity funds of the
beaten-by-benchmarks fund houses, sell and switch to schemes from fund houses
that populate the other end of the spectrum. Often investors get attracted to
the lesser known fund houses and schemes by the carrot of a resurgent fund
house or a scheme that will do really well. As a small investor with limited
resources and risk appetite, remove the noise of non-performing fund houses and
new fund houses. Let the high networth, seasoned investors take the higher risk
needed to punt on a new fund house or the resurgent scheme of an old one. Your
money is limited and so is your risk appetite. Stay with the proven winners.
And start looking at benchmarks.
Source: http://www.livemint.com/2012/06/26211123/India8217s-worst-fund-house.html
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