Most Large-Cap Funds Beat The Benchmark As Nifty Hit Peak. Did Yours?
Over the past year, when the Nifty 50 added over 5,000 points to hit an all-time high, as many as 21 of the 30 actively managed large-cap funds have beaten their benchmarks.
Managers of large-cap mutual funds have often borne the ridicule of a growing tribe of investors in passive strategies. This has been on account of their inability to consistently beat benchmark returns. But, their recent performance will leave them feeling somewhat vindicated.
Over the past year, when the benchmark Nifty 50 added over 5,000 points to hit an all-time high, as many as 21 of the 30 actively managed large-cap funds have beaten their benchmarks, according to data compiled by NDTV Profit.
To be sure, most of these schemes match themselves to a wider benchmark than the Nifty 50—either the BSE 100 or the Nifty 100. That's because the Association of Mutual Funds in India classifies the top 100 stocks by market capitalisation as large caps.
The rules set by the Securities and Exchange Board of India that govern portfolio construction in the category leave fund managers limited room to maneuver. As much as 80% of the assets under management in these schemes must be invested in large caps at any given time.
The smaller universe of large-cap stocks for investment, coupled with the limited wiggle room to add stocks from the wider markets, has meant that fund managers have struggled to beat the benchmark. But last year was a different story.
What Changed For Large-Cap Funds?
The schemes that have managed to handily beat the benchmark have done so because of active weight management in their portfolios, according to Santosh Joseph, founder of Germinate Investment Services.
In the past, fund managers have resorted to "hugging the benchmark" in a bid to yield returns that were comparable to the index. As a result, they would have large exposure to heavyweight stocks like HDFC Bank Ltd. and Reliance Industries Ltd., among others.
Fund managers have now shifted away from this strategy, according to Joseph.
“It’s not just active selection of stocks, but also active de-selection of stocks by fund managers,” he said.
What this means is that fund managers that avoided underperforming heavyweights like HDFC Bank were more likely to have beaten the benchmark.
Broader Market Investment
The outperformance of actively managed funds could also be attributed to the tactical investments made by the fund managers from the broader markets. These are the stocks selected by the fund manager outside of the mandated 80% in large caps.
Broader markets significantly outperformed the Nifty 50 over a one-year period. During this time, the Nifty SmallCap 250 and the Nifty MidCap 150 rose 65% and 58.5%, respectively, as of Tuesday's close.
Public Sector Run-Up
The top performing large-cap funds also have invested in public sector undertakings that have been at the forefront of the bull run.
The Nifty PSE has seen a 112.5% increase in value over the last year.
For instance, Bharat Heavy Electronics Ltd. is a public sector undertaking that is part of multiple large-cap funds like Mirae Asset Large Cap Fund, Nippon India Large Cap Fund, HSBC Large Cap fund and many others. Over the past year, BHEL shares have risen over 250%.
Will The Outperformance Continue?
The outperformance has been significant in the past year but the sustainability of this run-up is uncertain, according to Mrin Agarwal, director at Finsafe India.
"It is good to see the outperformance, but it is important to look at the rolling returns," said Agarwal.
Large caps have underperformed over the last five-seven years and Agarwal recommends index funds for the long-term.
A flexi-cap fund strategy, which allows fund managers the freedom to choose stocks from across market capitalisation, is a better selection than large-cap funds, she said. These funds have traditionally had a sizable exposure to large caps, without the regulatory requirement to maintain a certain threshold.
