Representatives are reflected in a mirrored wall while climbing a staircase. (Photographer: Daniel Acker/Bloomberg)

The Mutual Fund Show: This Asset Manager Topped Crisil’s Ranking And How…

In a volatile year for equities, none of the mutual fund schemes offered positive returns. While large cap funds dropped the least, small caps performed better than their corresponding benchmarks.

Based on their performance, Crisil ranked 462 funds as of September. Of this, 200 are equity funds, 214 are debt and 48 are hybrid. ICICI Prudential Mutual Fund led the asset managers with its 11 schemes featuring in the top 30 percentile of the CRISIL Mutual Fund Ranking. It was followed by Axis Mutual Fund and L&T Mutual Fund. ICICI Prudential Mutual Fund topped the equity funds as well with six schemes in the top 30 percentile, followed by Invesco Mutual Fund. Among debt funds, the top slot was occupied by L&T Mutual Fund. Axis Mutual Fund ranked second.

This also comes in a year the market regulator decided to lower expenses paid by investors of equity mutual funds. It capped the maximum total expense ratio for closed-end equity schemes to 1.25 percent and other equity schemes to 1 percent. The average assets under management rose to Rs 24.35 lakh crore in the September quarter. But a fall in debt-oriented funds AUM restricted a further rise in the period.

On BloombergQuint’s weekly series The Mutual Fund Show, Jiju Vidyadharan, senior director of funds and fixed income at Crisil Research, speaks about how they arrived at the rankings.

Watch the full interaction here:

Also read: What India’s Top Three Mutual Funds Bought And Sold In October

Here are the edited excerpts from the conversation:

What is so special about the Axis Bluechip Fund? How it has got the No. 1 ranking?

Jiju Vidyadharan: All large cap funds, except Axis have generated returns which are lower than the Nifty, during the period of analysis, especially in the last nine months. There have been nine stocks that have done phenomenally well. It is a skewed index and therefore those nine stocks have contributed significantly to the Nifty’s performance. Large cap funds have performed much weaker than the Nifty.

What worked for Axis is its allocation to sectors. There have been three or four sectors which have done very well in recent times. IT being one and consumer discretionary is another. The allocation to these sectors have been higher and selection too. Some stocks like TCS, Britannia, HUL, Page industries have done significantly well and that has contributed to Axis Bluechip Fund. In summation, it is a combination of allocation and superior stock selection that helped them outperform peers as well as the index.

What made HDFC Top 100 Fund do well and climb the ranking to No. 2?

Vidyadharan: In HDFC, allocation ranges from 24-70 odd stocks. HDFC has more than 50 stocks in terms of their portfolio. They have run some concentrated positions in terms of their overall portfolio construction, which means that on aspects such as concentration on company and sectors, they have done weaker than peers. But the concentration has been in sectors which have done well than peers and that helped them move up the ranks. It is allocation which is playing out for the HDFC Fund too in relation to peers.

What’s happening with HSBC Large Cap Fund? Why such a sharp pull back?

Vidyadharan: What has not worked for HSBC in the current quarter or current nine months is some of the sectoral exposures. They had exposure in auto, telecom, etc. Companies like Bharti Airtel and Maruti have not helped it. That is the core reason why the fund has slipped in terms of performance.

What is so special about Mirae Asset India Equity Fund?

Vidyadharan: In the multi-cap category, the performance of funds has been weaker than the index in aggregate. What has worked specifically for Mirae is its exposure in some sectors like FMCG, software, etc. where the fund was overweight.

Do you think multi caps will be the better way for an average investor as it gives exposure across market capitalisation and might better enable you to take advantage of the high beta nature of the Indian market as well?

Vidyadharan: We will believe so. In case of categories like large cap, and now with the whole focus shifting to total return indices and so on, you will see alpha shrinking. So, the excess return which you are paying will have to come by way of flexi-cap strategy or by way of small- and mid-cap funds. Those small and mid caps will carry some degree of incremental risk.

The ICICI Prudential Multicap Fund improved the ranking. What has worked in this fund’s favor?

Vidyadharan: A combination of sectoral calls and stock selections. Some of the sectors which have worked for them are pharma, IT and FMCG. The companies which have helped them in terms of performance is exposure in Cipla, Alembic Pharma, Wipro and Infosys. These were overweight and helped them generate better performance in recent rankings.

What is happening with Motilal Oswal Multicap 35 Fund?

Vidyadharan: The central theme for the asset management company is taking concentrated bets. They have limited number of stocks in their portfolio. It works well if your bets are going right. It can hit you otherwise. Here, it is all about stock-picking. Some stocks which has not done well in recent times are some of the petroleum stocks like BPCL and HPCL. They had some exposure to Manpasand Beverages, that also was a detractor in terms of overall performance. Stock selection and concentration—the combination of two is leading to weaker performance at this point of time. It can work the other way around. If the stock just picks up, the performance will be higher as we saw some time back in some of the Motilal Oswal funds.

Axis Midcap maintained its No. 1 rank. What worked for them?

Vidyadharan: It’s the same thing—stock selection, concentrated exposures, specific stocks like Gruh Finance, Page industries, Bajaj Finance which worked very positively in their favour. For both this and the large-cap fund stock selection worked well.

What is so special about the Franklin India Pharma Fund? They have managed to move up the rankings.

Vidyadharan: What we see in Franklin funds is a lot of consistency in terms of performance. It is much less volatile. The returns would not be extraordinary but it is consistent which is helping the fund in terms of overall performance. That is a good theme to have, which is consistent and not too much of super normal activity happening.

For HDFC Midcap Opportunities Fund, they have slipped the ranking. What is happening?

Vidyadharan: In terms of performance, the fund is at No. 2. It is losing ranking in portfolio-based attributes. One of the reasons is because it is a large fund. It has Rs 21,000 crore worth of assets. As it is in mid-cap space, it is a difficult fund to manage from concentration or liquidity perspective.

What is your advice for people who are looking to invest in small-cap funds? Is it a good time to start off?

Vidyadharan: There is never a bad time. The key is long-term investing. If you are looking at maximising returns from equity, then small cap is clearly the category that you ought to be looking at. It is also important to ensure that you get the right funds. It is not a passive kind of strategy. Large cap, while it is active, will get returns that is close to the index because you are constrained by the universe you are allowed to invest in. Here, it is a pure stock selection which is going to play out. Therefore, it becomes important to review funds that you have exposures in. You would be better off putting your money in small- and mid-cap funds if you have a very long investment horizon.

The HDFC Small Cap Fund is No. 1 in last returns and even right now. What is working for it?

Vidyadharan: One is stock selection. Some companies like Atul Ltd., Carborundum and Aarti Industries worked well for them. The other notable theme of the fund is cash calls. They have higher exposure in cash. They have limited the downside while taking exposure in cash. This means that their fall amid what happened in the small-cap space has been much less. While on cash call, it gets deviated at length. We had done an analysis in the past. While we may call it passive, it has to be actively managed. If you don’t get the timing right, you can lose out on the upside. It is the agility for the manager to get the direction right and shift between cash and equity that will drive performance in the long run. In the current situation, the cash strategy helped the fund.

SBI Small Cap Fund has moved a notch or two. They have had above average return score with average volatility. Is that a key attribute?

Vidyadharan: Volatility across categories has been high except for HDFC Fund as it had some exposure in cash. For SBI, some of the stock picks that they have had like Graphite India, Radico Khaitan and Westlife Development helped in terms of overall performance.

DSP Small Cap Fund was ranked No. 4 and stayed at No. 4. What has happened in last 10 months?

Vidyadharan: One key theme coming out across small cap, mid cap, etc., is there have been a set of stocks that have taken a beating and there are some that contributed significantly to the performances. So, there is a clear distinction in good and weak performance. A lot of exposure which DSP had in its portfolio have not done well in the recent nine to 18 months. That’s what led to the fund slipping in performance and staying in a range. To quote a few, Eveready, APL Apollo Tubes and Repco Home Finance are there in its portfolio that have not done well in the recent past and led to the fund’s weak performance.

Also read: Inflows Into Equity Mutual Funds Hit Eight-Month High In October