The Mutual Fund Show: Crisil’s Ranking Of The Best Schemes After June Quarter
Mutual fund houses managed more money in the quarter ended June as investors turned upbeat after Prime Minister Narendra Modi returned to power with an even bigger mandate.
Open-ended equity funds, which witnessed an inflow of Rs 17,700 crore during the period, were the biggest contributors to the growth of the industry’s assets under management.
Based on the performance, Crisil ranked 472 mutual fund schemes—that account for 84.86 percent of the industry’s open-ended AUM—as of June. Of these, 213 are equity schemes, 211 debt and 48 are hybrid. Among the fund houses, Kotak Mahindra Mutual Fund and SBI Mutual Fund together secured the top spot with their 13 schemes featuring in the top 30 percentile of Crisil Mutual Fund Ranking. HDFC Mutual Fund followed with 11 schemes.
Kotak Mahindra Mutual Fund and SBI Mutual Fund topped the equity funds as well with six schemes in the top 30 percentile. IDFC Mutual Fund retained its lead with eight funds in the debt category.
The rating agency also ranked 26 large-cap, 25 multi-cap, 20 mid-cap and 12 small-cap schemes. Among the large caps, Axis Bluechip Fund moved up one place to claim the first rank. DSP Top 100 Equity Fund climbed two places to the third spot—the biggest jump in the category.
“Ranking of the schemes is based on various parameters such as mean return and volatility over time, portfolio concentrations and exposure to sensitive sectors, among others,” said Bhushan Kedar, director (funds and fixed income) at rating agency. “The mean return and the risk profile have been the best for Axis BlueChip Fund, which makes it the top-ranked fund in the large-cap category.”
Besides returns, the fund has improved in industry concentration, he said in BloombergQuint’s this week’s episode of The Mutual Fund Show.
Watch the full show here to know how Crisil’s ranking can help investors choose the right fund...
Here are the edited excerpts from the interview:
Has it been difficult to figure out which funds will do well and therefore climb up the rankings?
In terms of criteria, the approach that Crisil has built over a period of time takes care of such volatilities that markets would typically go through. For equity funds, we also look at three year’s data which basically takes care of maybe one or two different cycles for the purpose of evaluation.
Over a period of time, we’ve seen that as you put a longer period data, it really helps you take the right evaluation of the fund. We also look at the latest period where the weights are the highest, which also gives you a sense of the momentum which is therein the performance is captured appropriately.
Are there any changes in the criteria per se at this time around?
No. However, what we really do each year, during March, is that we look if there are changes in market dynamics and is there’s anything that really needs to be changed in the criteria for the purpose of evaluation of funds. It is a review process. Of course, there are not really any significant changes per se from the evaluation standpoint.
Let’s talk about the funds. For the sake of simplicity, we have classified them into four categories—large cap, multi cap, mid cap and small cap. Lets start off with the large-cap funds. The rankings and the number one, number two and number three funds are, Axis BlueChip Fund, Tata Large Cap Fund and the DSP Top 100 Equity Fund. All of these clearly, have inched up from where they were in March. Why has this happened? Can we start with Axis for example?
It is actually a relative framework. There are two reasons why funds really move. One is, their absolute performance is either better or worse and two, since it is relative, there are other funds which would’ve done either bad or better than these funds. That’s a reason for change in the ranking.
Large cap as a category, in terms of one year performance, you’d see what has really happened is—the markets have been flattish. Performance has been skewed by some of the specific stock. In the small or mid cap, we have actually seen flattish or a negative performance.
So, we scored funds on the basis of mean return that they would have earned and also on the basis of the risk profiling. What we have seen, in the large-cap category these funds that have typically moved up in their performance ranking and that is what gives a major boost to the overall ranking. Axis, specifically, if you were to look at. First, besides the performance, it has also improved on the industry concentration bit by a notch. It was five last time and moved up to the fourth rank.
And in terms to specific stocks, I think Bajaj Finance, HDFC, Kotak Mahindra, all financial services entities outperformed vis-à-vis benchmark as well as their peers.
When you look at the components of the number two and number three fund, which are Tata Large Cap Fund or the DSP Top 100 Equity Fund, they have an overarching preference for financials and that is probably the reason why they have inched up.
That is right, and we also have to look at the large-cap universe—the top 100 stocks. And when we talk about the top 100 stocks, which you would also see in Nifty 100, there is already a skew in the financial institution segment and that is really a bias but you don’t have a choice and you will end up taking the stock. Fortunately, these entities have done well and that has really aided the performance. What probably has not gone in the right way or probably has created some deficit or negative alpha for some of these funds in the large-cap category is the performance of large-cap indices— the total return indices that you would have seen have actually outperformed many of the large-cap active funds. That is why people have started looking at these funds more closely. In small and mid cap, you continue to see there’s alpha being generated by active funds. But large cap is where there is clearly some gap I had seen in the active versus the passive funds.
What has done well for multi cap funds and why?
In case of multi caps, you leave it to the fund manager who decides where to put money at that juncture. The skew this time around is on large caps because they were doing well. If the markets were to swing the other way and mid and small caps start to rally, you would expect the fund managers to allocate more to those portfolios and I think that is where the end investors can really benefit. That is really the beauty of this specific category.
Coming to the funds we are looking at, clearly the Kotak Fund and the SBI Fund. That’s because the skew is towards the large caps and BFSI entities—ICICI Bank, HDFC Bank, Axis Bank and one manufacturing conglomerate name L&T. All of them have contributed to its performance. The allocation the fund has done to these entities is anything between 5 percent and 10 percent and because they have made a decent performance, you’ve been able to get more contribution from those stocks to do the overall alpha of the fund. These funds have also consistently performed well over the last three years so, it is just not the quarter. If you look at any period, three months or nine months or three years, Kotak Multicap has definitely done well.
What has not worked for HSBC, even though it still retains its post in the top five?
The answer lies in the stock selection. And to some extent the allocation and the period for which you are holding the stock. In the recent past, Yes Bank, Bharat Inclusion, Aurobindo Pharma, Sun TV have not done well. Also, stocks like Tata Motors and Welspun were there in the large part of their three-year portfolio. Probably, they held it almost throughout the period or maybe 80 percent of the times, which were basically dragging the performance. That is where one, stock selection and two, the conviction about that stock and three, is the allocation that you make. All of them dragged the performance of the HSBC fund.
What is happening with the Tata stable because I see their presence increasing. You had not normally seen them in the past but in the large-cap category, they are in the top three, in the mid cap category they are in the top three. Is there a choice of fund managers or a change of investing strategy of the Tata AMC?
Some of the bets that they have now been putting on are working. What I see in terms of their conviction about their stocks—the ratio of staying put with the stocks continues to remain good. Rupesh Patel (of Tata Asset Management) is looking at the mid-cap or some of the other funds. It has been able to pick up some of the stocks in the mid-cap or small-cap space or doing the right allocation in some of the large-cap categories also. That is something, which is paying well for them right now.
What stood out for the Kotak Emerging Fund?
One, the stocks that we are looking at, and it is a mixed bag. Because the way mid-cap and small-cap funds work, it is completely a bottom-up strategy that you work with. In terms of performance numbers, what we are talking about is, some of them have delivered 10-15 percent in the quarter and some 20-30 percent. That adds up to the alpha. Two, again it is a relative ranking. What we have seen in mid and small caps is where the performance either has been flattish or negative, that is what is also leading to the positive performances put out by some of the stocks and the funds really stand out.
The Motilal Oswal Midcap 30 Fund has probably not done as well in the past nine months compared to three years. Yet it moved up a rank, why so?
...Its nine-month and three-year performance, even though it is not outstanding or not better than the peers, within the fourth and fifth funds category, it’s the outperformer. Hence, it has been able to inch up a little in the overall ranking.
The MOSL funds, because they are concentrated and because they take specific bets, haven’t had the best last nine months. Despite the fact that they moved up in the rankings, would you believe that the number one funds, and the number two funds would be better placed to invest in or nothing like that?
Definitely in this case, you have to watch out for their performance. As you pointed out they are taking a concentrated bet and I think that is really the philosophy that they thrive on and investors who are willing to look at concentrated bets I think this is definitely a fund they can watch out for. Two, as a ranking provider, we look at concentration as one of the criteria for risks. And the overall framework basically takes into account both return as well as the risk from concentration or volatility standpoint and the overall assessment is put out. If you look at this picture holistically, you would definitely say, given the concentration and the performance, which is not really today superlative, definitely the fund needs to be watched out further.
The last category is the small cap category. Now there the names don’t surprise me at all, some of them, the consistent performers, some of them have done really well, fundamentally or in terms of returns in the last few months. The kind of contrast in returns is also interesting and which is why I want your view out here. First, the number one fund, the Axis small cap fund stays at the number one category and the performance says it all. 13 percent in the last nine months is not something most funds would have been able to deliver—large, mid or small.
It is clearly a superlative performance. Where it is coming from? One, picking up stocks and the names are Vinati Organics or TCNS Clothing or City Union Bank. These are the names and if you look at the performance some of them are at 70 percent, 33 percent in the recent past. One is the performance that they have delivered, two, going back to the conviction logic and you have picked a stock, and you have stayed put with the stock throughout the period. And it is not that the fund has just delivered in the past three months, nine months, if you look at any performance cut, the fund stands out. It is the first time that the fund has come because they have met the three-year criteria. They straightaway entered the rank one, they didn’t have a rank earlier. But I think the three-year track record has been good.
Why has HDFC Small Cap Fund dropped a rank? Why is it equated to the Axis Small Cap Fund?
HDFC Fund has dropped and the reason is the recent performance. Even though the three-year performance is good, the momentum is also captured in the ranking. In recent past, the stocks that they have had—Bal Krishna Industries or Aurobindo Pharma or McLeod Russel—they have been the draggers and that has led to a drop in their performance and that needs to be watched out for in the quarter to come.
When I look some of the stocks, I have no idea if the HDFC Small Cap Fund still has some of these funds or we will get to know about them later, if indeed they are in a lock-stock-barrel-sell. But most of these aren’t quite performing fundamentally. If this continues, would the fund have a chance of slipping both in performance as well is in ranking?
One cannot really rule out that. It is going to be a combination of some of the other things also. One, what you are holding. Small and mid caps are a very small category. There are about just 12 funds today that we are ranking. In each quarter or in each category you have very limited set of funds. If you slip on performance, you may slip further. But it is important to watch out on what do they really stick onto or get out of. That plays a very important role.
The last one in this category is the Sundaram Small Cap Fund. How is it that it has stayed on the fifth spot? Is it because it had very limited funds and others are not doing well or worse than Sundaram?
There is a one notch improvement in the performance of Sundaram Small Cap Fund this time around. But in some of the other parameters, it continues to remain low, which is volatility and concentration. They have the concentrated bets. That is where the challenge for this fund is. It continues to remain flattish vis-à-vis the earlier quarter.
Some of the financial names are still holding out. Is it safe to assume that, if indeed that performance continues, then the ones which have done well thus far, and largely on the accounts of the presence on the financials could likely continue to do well and find preference in your rankings as well? Because, arguably, the high-quality financials is the only pocket along with consumers which are holding up?
Yes, if the bluechip names we are talking about, the performance really holds on and the allocation. If the allocation is not tinkered with, then the performance could be sort of held onto unless you’re making some radically different decisions of exiting or entering into new stocks. That is where that the issue could arise. Markets have been volatile. After some of the clarification that may come in, maybe on taxation, how the markets will react, all that will also determine the fate of the equity markets and the performance of the funds for the next couple of rankings that we will release.