Over the last five years, the majority of actively-managed large-cap equity and debt funds have underperformed their respective benchmarks, according to the latest S&P Indices scorecard on fund performance vis-a-vis their benchmarks. Naturally, the report’s findings have not gone down well with the industry.

Improvement possible According to the study, conducted twice a year by S&P Dow Jones Indices, over a three- and five-year periods ending December 2014, 58 per cent and 53 per cent of active large-cap funds underperformed the benchmark. Their performance however, improved over the last one year with only less than 25 per cent of funds underperforming.

The active funds in the government bond category also fared badly against the S&P India Government Bond Index. In fact, the percentage of active funds that underperformed the benchmark increased as the time period climbed, with 61 per cent, 62 per cent and 76 per cent of funds underperforming over the one-, three-, and five-year time periods, respectively.

Among fund categories, according to the study, only equity-linked saving schemes (ELSS) and mid- and small-cap equity funds outperformed their respective benchmarks.

Varying opinions Utkarsh Agrawal, Senior Analyst at Asia Index Pvt Ltd, said in a press statement: “The scorecard reveals that over shorter time periods, actively managed funds may outperform the benchmark, but it becomes difficult for the fund managers to maintain the performance over longer periods.”

But industry analysts seem to disagree with the report’s findings. Vidya Bala, Head of Mutual Funds Research at FundsIndia.com, believes the categorisation of large-cap funds can vary. “There are very few pure large-cap funds, most take some exposure to mid- and small-cap segments as well.

Also, the study’s conclusions depend on the time periods taken into account. (Despite this) saying that over half of all funds have underperformed is surprising. If you compare these funds to ideal benchmarks, well over 50 per cent have comfortably outperformed.”

The question of funds choosing the right benchmark is also a factor Agrawal of Asia Index dwells on. “Mutual funds sometimes take benchmarks that are not appropriate to their investments. (For the study) if it’s a large-cap fund, we won’t take the BSE 500 as benchmark (which the funds might have chosen) but the BSE 100. These funds might have outperformed the BSE 500, but not the BSE 100.”

Ranking among peers Mahesh R Patil, co-Chief Investment Officer, Birla Sun Life AMC, says such a study must look not at just different funds and their performance but must also rank them according to the size of the fund. Looking at the whole fund universe in large-caps, he said, “25-30 per cent of funds would have underperformed. But comparing a fund with assets worth ₹10 crore and another fund with assets worth ₹10,000 crore would make little sense. The bulk of investor money is in the larger fund.

“The right way to look at this is for funds to be given weightage by their asset sizes and then their performance marked accordingly.”

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