Equity MF: 2016 report card

Here are five trends thrown up by our analysis of the performance of equity mutual funds in 2016



Both 2015 and 2016 have been quite volatile for equity markets. But while 2015 sported an air of optimism, ‘caution’ seems to have been the watchword in 2016.

Ever since 2014, mid- and small-cap funds have done well; but after two years of high growth, only the deserving among them have continued to shine this year.

Given the stretched valuations in many cyclical sectors, value investing appears to have paid off this year. Worries on expanding valuations saw funds that invest in spaces such as MNC and FMCG lag; at the same time commodities and banking funds got a new lease of life after the rout last year.

With rate cuts by the RBI enthusing bond markets, quite a few equity-oriented balanced funds (which invest up to 35 per cent in debt), managed to deliver double-digit returns, on par with the toppers among diversified funds.

Overall, in what has been yet another iffy year for the markets so far, mutual funds have once again proved to be safer bets (data as on November 16, 2016). Even as the broader markets represented by the Nifty 500 and BSE 500 indices managed to gain only about 2.5 per cent and the bellwethers Sensex and Nifty 50 moved up by a much lower 0.5-1.8 per cent, diversified equity funds have gained more.

The 159 diversified equity funds currently in existence clocked an average return of 4.2 per cent, outdoing the indices by a reasonable margin. Of the 159 funds, 96 funds or 60 per cent of them bettered the broader market indices; about 70 per cent of the funds outdid the Nifty 50’s 1.8 per cent return while almost 85 per cent of them emerged more triumphant than the Sensex.

Here are five trends that our analysis of the performance of equity mutual funds so far in 2016 has thrown up:

Mid-/Small-cap funds: Still on top

While the broader indices and the bellwethers weren’t sure-footed, the mid-cap indices emerged more optimistic this calendar year. The BSE Midcap and the Nifty Midcap 50 indices have moved up by 5-7 per cent so far, convincingly beating the returns of the Nifty 50/Sensex and the BSE/Nifty 500.

These indices have carried forward the enthusiasm they showed in 2014 and 2015. Expectation of a strong economic recovery which in turn would create demand, improve capacity utilisation and reduce debt burden for small and medium companies pushed up these stocks in 2014. Into 2015, recovery took longer than expected; but a sharp drop in raw material costs for companies due to a commodity meltdown lent a helping hand to the bottom-line. In 2016, global cues for the markets turned worse with no respite from a slowdown in China, Britain choosing to exit the European Union and the US going into election mode.

But a pick-up in some sectors such as auto, consumer durables/discretionaries and cement domestically helped mid-cap stocks in this space race ahead. Easing interest cost burden for mid-sized companies also enthused the markets. Despite volatility and corrections, mid-cap stocks continued to be favoured in 2016.

Mid-cap funds have hence emerged among the winners with eight out of the 16 diversified funds that clocked double-digit returns this year being mid-cap funds. Funds such as Mirae Asset Emerging Bluechip, HDFC Mid-Cap Opportunites, Kotak Emerging Equity, Birla Sun Life Small and Midcap, DSPBR Small and Midcap and Principal Emerging Bluechip were among the toppers.

Overall, approximately one in every two mid-cap funds (i.e. 20 of 42) have outperformed the Nifty Mid-cap indices; 60 per cent of them have emerged better than the broader Nifty 500 index.

Large-/Multi-cap funds: Ride on value

For those who prefer a ‘high risk, high return’ strategy, mid-cap funds continued to give an adrenaline rush. At the same time, large-cap and multi-cap funds which bet on beaten down stocks did not lose out either. Consider Tata Equity P/E, a multi-cap fund which has a mandate to invest 70 per cent of its portfolio in stocks whose trailing price to earnings (PE) ratio is less than the Sensex. Its preference for value stocks from power, energy, construction and capital goods space pulled down its performance in 2015 when auto, auto ancillaries, software and pharma were still in vogue. The fund barely managed to make any gains last year. But the same strategy, along with timely exposures to private bank stocks, helped the fund deliver 14 per cent returns and have a podium finish this year.

ICICI Pru Dynamic (large-cap oriented), is another fund with a value bias that has scored double-digit returns this year after being in the bottom quartile in 2014 and 2015. HDFC Top 200 (large-cap oriented) and HDFC Equity (multi-cap), which were decimated last year due to their preference for the worn-down energy, industrial and public sector bank stocks, are among those that reaped rich gains this year. Quantum Long-Term Equity’s (large-cap) value picks also paid off this year. These three funds scored 8-9 per cent returns this year.

Sector and thematic funds: A breather for the overheated

Market discomfort on high valuation plays is visible in the performance of thematic and sector funds as well. Be it during the market fall of 2011, the volatile markets of 2013 and 2015 or the rally of 2014, MNC funds convincingly outperformed the Sensex, the Nifty 50 and their benchmark, the Nifty MNC Index. The willingness of investors to pay a premium for MNC firms for their deep pockets and strong balance sheets helped the funds gain sharply. But the gains of the past years had left the PE of funds such as Birla MNC at over a staggering 50 times (trailing) at the end of 2015. Hence, after being chart-toppers in the past years, both the MNC funds in the market — Birla Sun Life MNC and UTI MNC — faced the music. While the Nifty MNC index itself lost about 2 per cent in 2016, both these funds underperformed the benchmark, with their NAV falling 5-6 per cent this year.

High PEs of FMCG stocks also saw FMCG funds losing sheen. The BSE/Nifty FMCG indices underperformed the bellwethers and the broader market indices, barely managing to move up. SBI FMCG and ICICI Pru FMCG could hence muster only 1-2 per cent returns this year. Ditto with UTI Transportation and Logistics whose piggybacking on the cyclical auto and auto ancillaries stocks did not reap much dividends this year, due to expanding valuations in this space.

Besides, unlike in 2015 where they led from the forefront, IT and Pharma funds lost colour this year. While fresh worries of a global slowdown impacted IT stocks, the US FDA crackdown muted performance of pharma stocks.

On the other hand, banking, energy and power stocks, which had it tough in 2015, had their time under the sun this year. Stable asset quality and steady loan growth propelled private banks such as HDFC Bank, Axis, IndusInd and YES Bank. At the same time, beaten-down public sector bank stocks such as SBI, Bank of Baroda, etc, also found favour on the premise that the worst of the NPA troubles would soon be over with the write-offs mandated by the RBI and with interest rates declining and economic activity improving, loan growth would soon pick up. Stocks in the financing/financial services space such as Bajaj Finance and Cholamandalam Investment and Finance also did well. Banking sector funds gained anywhere between 10 and 25 per cent this year.

Ethical/ Shariah funds such as Tata Ethical and Taurus Ethical took the hit on the chin this year as they did not participate in the rally in banking stocks. Ironically, these funds which by mandate refrain from investing in banking and finance stocks were the darling of the markets in 2015, when the sector was troubled.

Reforms boost for the power and oil & gas space, along with stability in commodity prices after the steep fall last year, saw funds such as DSPBR Natural Resources and New Energy, SBI Magnum Comma, JM Basic and Sahara Power and Natural Resources clock double-digit gains in 2016 as well.

Balanced funds: Navigate choppy waters well

While the equity markets were volatile, risk-averse investors were not left without choices to park their money. Equity-oriented balanced funds, which invest up to 35 per cent of their corpus in debt instruments, stood tall as a ‘low risk, high return’ option in 2016. For one, lower exposures to equities than diversified funds helped these funds cut losses in volatile phases of the market.

At the same time, a rally in sovereign bond prices triggered by factors such as the RBI’s open market operations to buy bonds and policy rate cuts brought gains for funds that parked a portion of their money in government securities. From 7.7 per cent in the beginning of 2016, yield on the 10-year government bonds has dropped to about 6.5 per cent now. Besides, reasonably good rates in corporate credit instruments also helped. Funds such as Birla Sun Life Balanced Advantage, ICICI Pru Balanced, Kotak Balance, Sundaram Balanced and HDFC Prudence have clocked 10-14 per cent returns so far this year.

New funds: Clean sweep

Just as in 2015, some of the new funds (those less than five years old) have shared the limelight with their established peers this year. Among the 16 funds clocking double-digit growth this year are LIC Midcap, Peerless Midcap and IIFL India Growth fund. The general preference for mid-cap funds this season has helped the LIC and Peerless funds emerge on top. Launched in February 2015, LIC Midcap has a corpus of ₹99 crore now while the Peerless Midcap fund, which was launched towards the end of 2015, has ₹59 crore under its belt now. L&T Emerging Businesses (mid-cap fund), Motilal Oswal Focused Multicap 35 and ICICI Pru Dividend Yield are the other new funds which are among the top quartile performers this year.

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