The Mutual Fund Show: Here Are Crisil’s Top-Ranked Schemes
Crisil released rankings of mutual funds for the quarter ended March, in four categories: flexi-, large-, large and mid-cap funds, and contra schemes. In The Mutual Fund Show this week, Crisil discussed some of the top performers and key schemes:
Schemes in this category can invest in stocks across market capitalisation as opposed to 25% minimum allocation to large-, mid-, and small-cap funds.
The PGIM India Flexi Cap Fund was ranked No. 1 in the latest Crisil rankings, moving up from the second place in the quarter ended December.
The research firm said funds with a higher share of mid and small caps outperformed. And PGIM scheme significantly increased exposure to small caps with their share rising from 14.19% in August 2020 to 33.61% as of March 2021. That came at the expense of exposure to large-cap stocks.
Large-cap funds, despite a recent rebound, continue to lag the benchmark (Nifty 100 TRI) in last one and three years. Only 2 of 28 schemes have outperformed the benchmark over the three-year period.
UTI Large-Cap fund moved from the second to the first slot. Performance of some of heavyweight stocks aided its move up.
It has returned 43% gains in the last nine months and 69% in one year compared with the category’s average of 39% and 62%, respectively. In the three-year period, the scheme returned 14% gains compared with the category average of 11%.
Axis Bluechip Fund slipped from No. 1 to No. 3. It increased exposure to large cap stocks from 79.75% in May 2020 to 93.28% in March 2021, which affected its recent performance, according to Crisil. Meanwhile, the fund reduced cash share from 20.21% to 6.05% during period. It had almost no exposure to small and mid-cap stocks, and since these two categories performed better than large caps, the scheme underperformed.
Large and Mid-Cap Funds
This category too has fared like large-cap schemes. Performance has been dependent on stock selection and timing of entry and exit. Only four of 21 schemes in the category ranked by Crisil outperformed the benchmark (Nifty LargeMidcap 250 Index TRI) over a three-year period.
The Edelweiss Large and Midcap fund moved from second spot to first. The fund recorded 49.76% gains in the last nine months, outperforming the category’s average of 46.46% and the maximum return of 54.31% in the peer group. In the last three years, it posted 12.90% returns against the category average of 10.78%. The performance was aided by stock selection compared to allocation across market capitalisation, which has remained broadly consistent in the three years.
Watch the full interview here:
Here are the edited excerpts from the interview:
How is it that you arrive at the rankings for any category?
PIYUSH GUPTA: On the equity side, what we have is, we looked at multiple parameters. So, the focus is both on the performance of the fund along with the risk which is measured using volatility plus, the portfolio-based parameters. So, it’s a combination of performance and portfolio base attributes which define the final ranking of the funds. When we look at equity categories, given that the focus is largely on the performance of the fund, there is a higher base given to the performance parameter and on the portfolio side we looked at factors like concentration risk, liquidity risk, in the portfolio to measure the overall ranking of the fund.
For somebody who is looking to invest or is already invested in the flexi-cap category, what is it that should be watched out for?
PIYUSH GUPTA: With flexi-cap, this is a category which is kind of coming in with a new nomenclature. Earlier it used to be called as multi-cap category. In the interim we had a change in the definition of multi-cap and then we had a re-introduction of flexi-cap. So, essentially, the funds that we have ranked in this category which are the erstwhile multi-cap funds. The focus of this category typically is to generate returns for the investor by taking active calls across market capitalisation. So, if the fund manager believes that going forward, large caps are going to do well or maybe mid caps are going to do well, they do take those active calls, allocate into these different capitalisations depending on their view on the market. The ones who are able to take those calls correctly over a period of time will find the funds appearing on top as far as the performance are concerned. Having said that, stock selection is a key factor, irrespective of equity categories that we look at but in case of flexi-cap allocation also plays a vital role when it comes to the overall performance of the category.
Has that shown a dramatic change from what it used to be to what it is currently and does it give you the confidence that maybe performance or the alpha that the fund can generate would be better, because I’m guessing it would change with time, almost every single year?
PIYUSH GUPTA: In fact, when we looked at the last three years, there has been a shift in the allocation of flexi-cap funds between large cap versus mid-cap and small cap, largely due to the fact that in the recent one-year period, it’s the mid-cap stocks and the small-cap stocks, which have done better than large cap. If you look at the last one year’s performance, specifically the last financial year, large caps have delivered a return close to about odd 70% but when you look at mid caps and small caps the returns are in excess of 100% and that has been the key driver in terms of performance of the funds also in this category—the ones who have had a relatively higher exposure to small- and mid-cap stocks. They have basically improved their performance in the overall category.
I presume because you’re saying that it’s kind of a new category which is why we don’t have previous rankings for this category. Let’s talk about the fund which has gotten the highest ranking and one of the funds which has gotten the lowest ranking. Now, PGIM India Flexi-Cap Fund is ranked number one. What parameters led to this? Why is it that it’s standing out vis-à-vis a whole host of other funds which are there?
PIYUSH GUPTA: Before I come to the fund, I’d also maybe elaborate on why have we considered this to be a new category. After the introduction of the new definition for multi-cap, there was a re-categorisation of funds which happened. As far as this ranking is concerned, we have looked at all the funds which were a part of the erstwhile multi-cap category and which have got themselves reclassified into flexi-cap. Hence, we are not comparing the ranks of these funds with the previous quarter given that the universe was different compared to the current quarter. So that is one bit. As far as PGIM India flexi-cap fund is concerned, this is a fund which has been ranked one in the flexi-cap category. The key driver for its top rank is the fact that it has outperformed the benchmark as well as the category over a three-year period. Now, if you look in the recent times there are quite a few funds which have outperformed the benchmark. Now, while there is an outperformance you will observe over a category average, the outperformance over the benchmark has been lower in terms of number of funds. So, this is one of the funds which has actually outperformed the benchmark, as well as the category average both in the recent period as well as over a three-year period. Now, one of the key factors for its outperformance has been the fact that the fund increased its allocation into small-cap stocks from 14% from the August portfolio last year, compared to a 33% allocation in the recent year which is the March 2021 portfolio. In the same period, what you will find is the small caps have actually delivered significantly higher returns compared to mid-cap and large-cap stocks. This has meant that the fund has actually improved its performance significantly compared to the benchmark as well as the category average. Even in terms of concentration or diversification of the portfolio, while the fund has a lesser number of stocks compared to category average, the fund has on an average 43 stocks in the last nine months compared to a category average of 50 stocks. What has helped in its diversification is the fact that the allocation to each of the stocks have been more even and there is lesser skewness in this particular portfolio as compared to the other funds which are there in this category.
So, risk adjusted returns have been good, they’ve done it for a three-year period, and it’s a very well diversified fund in the sense that allocation between stocks is done very well in that fund compared to the others?
PIYUSH GUPTA: And it becomes an important parameter given the fact that the fund has increased its allocation to small- and mid-cap stocks and there, the diversification is a key factor because if you get your calls wrong then the performance can deviate quite significantly. Even from the diversification perspective, the fund has a very well diversified portfolio compared to PSL.
Just a word on it because it’s ranked number one and flexi-cap is a difficult category so to say, is the AUM making any kind of a difference to performance or not really?
PIYUSH GUPTA: I think the fund is relatively smaller, but it has seen an increase in AUM. I think it has almost doubled in the last one quarter. I said that it is still among the smallest fund in the category. It’s about a 600-odd-crore fund and to that extent it is a relatively smaller fund.
Let’s talk about the fund which is unfortunately, not there in the top rankings, but Motilal Oswal Flexi-Cap Fund which is ranked number five. Can you talk a bit about this famed house? They are known for stock-picking, but they are ranked number five in your rankings.
PIYUSH GUPTA: This particular fund, if I were to look at key takeaways from this fund, then one is that, the fund has over a period of time maintained a very concentrated portfolio and that’s primarily because they probably focus on the stock selection more when it comes to portfolio construction. What has also happened is, given that it’s a concentrated portfolio, the allocation across market capitalisation in this particular fund has been more tilted towards the large-cap universe and it is higher than the category average which meant that the allocation effect that you will typically see in terms of allocation across market capitalisation, that is where it has been left out in terms of the overall performance.
Just one quick follow up and that will be true for all categories but how easy or how regular could the factor of funds changing their rankings quite significantly occur? Is it possible that the number one ranked fund unless it does something dramatically different can very quickly in the next month’s ranking go to number three or could a number five fund jump to number one? Is that possible or does it happen regularly?
PIYUSH GUPTA: I wouldn’t say that it is not possible. There are few exceptional cases where the funds can move from one notch or two notches. One notch is something which will be more regular but two notches is something which is less common but there are times when, if there is a significant movement in the market in a short period of time and if the portfolio is positioned in a manner either favourably or unfavourably, it can have an impact on the overall ranking of the fund.
Let’s now move to the category wherein a lot of people say that, don’t invest in active funds and why pay those fees because the funds are not able to do well. Can you talk about the large-cap category because I think you made a very important point on the kind of underperformance the large-cap funds have?
PIYUSH GUPTA: I think large cap as a category, if you look at the funds which are present in this category, not many funds have been able to beat the market benchmark which is Nifty 50, Nifty 100 or BSE Sensex—all of these indices. If I look at even the last three years of performance. I think only two out of 28 plans have actually beaten the benchmark. So, to that extent, there is the underperformance vis-à-vis the market benchmark. Now, there are a couple of factors. One is, the large-cap as a category has a very tight investment mandate. 80% of the portfolio has to be invested into large-cap stocks, the investment universe is also very limited. You have 100 stocks when it comes to portfolio construction. So, to that extent the ability of a fund manager to pick the right stock and then generate also goes down significantly because the investment universe is relatively smaller compared to the other category. That’s been the key factor. The other thing is if you don’t get your stock selections correct then it can underperform. In the large-cap what we have also seen is, for the major part of the last three years, the performance has been driven by a few select stocks. So, to that extent if the fund doesn’t have those stocks and if they have an under exposure compared to the benchmark the underperformance does come in. Other than that, funds also need to work with the stock level limits. So, they can’t have more than 10% exposure to a single stock. That may not be the case with the benchmark. You can have a few stocks which are having a higher weight compared to the 10% limit with which the fund managers have to work with.
Let’s talk about the first fund which has actually done well in this category. It has moved up in its rankings from number two to number one. Why has UTI managed to do that?
PIYUSH GUPTA: So UTI, if I look at the performance of this fund, it has improved it’s performance in the recent period. I look at recent nine months or the one-year performance, it’s return has been about odd 43% for a nine-month period and almost 69% for a one-year period, but at the same time when we look at the category average it’s about 39% and 62%, respectively. So, to that extent the performance of this fund has been higher than the category in the recent period. Further, the fund has also maintained a higher performance even for a three-year period. So, the fund has delivered 14% return, compared to a category average of 11%. So, overall if you see even the near term as well as over a medium term, the upon performance has been higher than the category average. That’s been one of the factors. The second is, some of the stock selections which the fund has done like Infosys, ICICI Bank, HDFC Bank—largely the large-cap driven performance that we have observed at least in this particular fund. So, some of these large-cap stocks have contributed positively to its overall performance in the period for which we are doing the ranking for these funds.
Now let’s talk about the two funds which have actually not managed to do well. Axis Blue-Chip was considered to be pretty good. It has slipped from the number one to the number three ranking. What’s happened?
PIYUSH GUPTA: Axis, like you rightly mentioned has been one of the top-performing funds in the large-cap category and for a fairly long period of time. It has done well and hence when we even looked at its three-year performance, it’s still higher than the benchmark. What has not worked for Axis is the recent performance that we see in the Axis fund. If you look at its portfolio allocation over a period of time it has been largely towards the large-cap stocks and has taken very limited exposure to small and mid-cap stocks even for the three-year period. This meant that, at least when you look at initial two years of this ranking what we find is the fund was doing really well because at that time you saw large-caps outperforming small and mid-caps consistently during that period. What has happened in the recent period, is that in the last nine months, it has shifted some of it’s cash holdings which it had in the last year around April and May when there was a huge market correction, it gradually moved its allocation to large-cap stocks and it is one of the funds which has the highest allocation to large-cap compared to all the funds within the category. This means that its overall performance has been lower than the category average because of its allocation to large-cap as compared to some of the other funds which had a relatively higher allocation to small and mid-cap stocks.
Another fund, which I think a few weeks back an advisor had come and said it’s actually a big laggard in terms of returns in the large-cap space is DSP100. Can you talk a bit about that because I think it’s slipped further in rankings or at least it’s the one of the lowest ranked funds within your rankings?
PIYUSH GUPTA: Yes, in fact this is a fund which has ranked five in our overall ranking. We have a scale of one to five, one being the highest and five being the lowest. In fact, it has slipped from four to five in the last quarter. The fund has like you rightly mentioned has delivered lower returns over a period of time. When we looked at the three-year performance it’s only 9% compared to category average of 11%. So, almost a two-percentage point difference there. In the recent period too, the fund has delivered 36% in the nine-month period compared to a 39% overall over the same period of time by the category average. So, in a way, the fund has been delivering weaker performance over a period of time. If I looked at some of the stocks which has contributed negatively, these are largely, if I look at it, even though it’s a large-cap category, some of the mid-caps have actually been a sluggard in terms of the performance. For instance, of stocks like Ashok Leyland, Bharat Forge and IndusInd bank—some of these stocks have actually contributed negatively to the overall performance even in the recent period.
Now, the categories of large and mid-cap. Is it the same things to watch out for when it comes to large and mid-caps that you can watch out for large-caps or is there some difference there?
PIYUSH GUPTA: I would say in large cap, there the stock selection is key because there is very little leeway in terms of allocation be it in terms of sectors as well as in terms of market cap. Large-mid to some extent, there is some play which is there in terms of allocation across capitalisation. This is also visible when we look at the recent portfolios over the last nine months again, the fund in this particular category has seen a slight increase in the allocation towards small and mid cap compared to large cap. In a way that also has been a driver in terms of performance of some of the funds in this particular category.
Is that why Edelweiss has done what it has done because I see that in large and mid-cap there is a lot of changes in rankings. So, I think Edelweiss has moved up from number three or number two to number one. Why is it that it’s ranked number one in the category? Again risk-adjusted returns, or higher allocation to mid-caps and small-caps is that the reason?
PIYUSH GUPTA: In terms of allocation like you mentioned, has been higher for this particular fund into small- and mid-cap stocks which has meant that the performance has gone up significantly in the recent period, which has meant that there is an improvement in the overall ranking. Having said that, it has maintained its ranking as far as the volatility is concerned. So, while the performance has improved the volatility has not slipped for this particular fund which meant that in the performance of this fund, the overall ranking has gone up. From the perspective of diversification, while it’s not among the top funds, but it is a fairly diversified portfolio that we see compared to the overall category.
What reasons for the laggard to do what it has done? I think Invesco is the one which is really low on the rankings?
PIYUSH GUPTA: In fact, Invesco has come down significantly in terms of ranking. It was ranked three in the previous quarter it has come down to five in this quarter. The performance in the recent period has actually dragged it’s performance by a significant margin. If look at maybe a three-year performance, the fund has not been very different from the category average. It’s the recent performance in the last quarter and in the nine months where the fund has come down significantly in terms of performance. In this particular fund, I would say the stock selection has not gone right and which has meant that the performance has deteriorated significantly, and we see some of the stocks—be it large-cap or maybe mid-cap for both the categories you will see that there are some laggards which is pulling down its performance.
The last category view which is, value or the contra funds. Now, here’s the interesting bit, what I found actually a bit intriguing as for your rankings or otherwise, that most people would be of the opinion that in value or in contra funds, what would matter is not the allocation to market cap, but the contra bet and the allocation that you do to particular bets which are out of favour. Are you saying more than that, the market capitalisation allocations have mattered in the recent rankings?
PIYUSH GUPTA: In this category again, it comes out quite clearly. When we looked at these two funds which is ICICI Prudential Value Discovery and IDFC Sterling, in IDFC Sterling we see that the performance has largely been driven by the small-cap stocks and it has increased its allocation to small-cap stocks quite significantly which meant that the performance has gone up for this fund and has also resulted in improvement in the overall ranking. With ICICI Prudential, again I would say with the performance, again while there is a slight decline in the recent period, but this fund has still a relatively better ranking and it’s largely driven by the senior performance. The fund has delivered 11% compared to the category average of 8%.
And both of these have moved up from number three ranking to number two and number one, respectively, so did they have some qualitative parameters working very well for them?
PIYUSH GUPTA: Yes, in case of ICICI Prudential, I don’t think it is the market cap which has worked for them. It is largely the stock selection which has actually played out well for ICICI Prudential Value Discovery fund. In the case of IDFC, it is largely the stock selection in the small-cap space and mid-cap space that has actually contributed to its performance.
How is it that these rankings would help investors? What is it that investors should do after they watch the show or when they read the story around the show as well and they look at the rankings? What is it that by virtue of these rankings can help them in their investment making decisions?
PIYUSH GUPTA: I think one of the key factor that we look at when we carry out these rankings, is the consistency of performance. We make use of rolling returns to measure the performance of the fund over the last three years and the funds which have done well consistently in the last three years, they tend to come on top. That’s one bit. Even otherwise also, when you’re looking at these rankings, look at these rankings over a period of time. A fund which has maintained the consistency in ranking over a period of time, are some the funds that you can maybe look at.