In the past year, as the markets have been rocked by unabating volatility, equity diversified funds have proved their mettle. They have efficiently managed the ups and downs caused by factors such as higher interest rates, rupee depreciation, sticky inflation rate, weak global demand, higher valuations and geopolitical issues. Despite the high volatility, 78 out of 149 equity diversified funds have delivered returns higher than their benchmarks on a point-to-point basis. In other words, 52.4% of such funds have generated positive excess returns (fund return, minus the benchmark return). The beta statistic also reveals the ability of such funds in handling volatility.
This statistic is available for 125 funds, and of these, 114 have maintained a beta of less than one in the past year, indicating lower NAV fluctuations compared to the market benchmarks (on an average). Close to 70% of such funds have generated positive alpha (higher than expected returns) in the past year. The data has been sourced from ACE MF database and is based on 1 September 2023 NAVs. However, the above data also shows that all funds have not done well and, therefore, it is crucial for investors to identify good funds to achieve their investment goals. Though there are several ways of identifying the quality of a fund, excess return is among the more well-known methods. A fund that generates positive excess returns across multiple time frames generally has a robust asset mix that provides resistance during an unpredictable market environment.
Calculating excess return
Excess returns can be worked out using the trailing method (point-to-point) or rolling method. The past year performance, as depicted above, was derived using the point-to-point method. However, this method is not free from biases as it fails to indicate whether the performance was consistent during the period under consideration. For example, if on the base date, the market (or NAV) closed lower, and on the end date, the market (or NAV) closed higher, the point-to-point method will show healthy performance. A more efficient way of analysing excess returns is by using rolling returns. It provides greater clarity on the fund’s performance. This is because the rolling returns allow performance evaluation during different market phases, and enable better assessment of return consistency. The rolling returns are point-to-point returns calculated regularly for a defined interval like a week, month, quarter or, a year.
Identifying good funds
ET Wealth analysed the excess returns that equity diversified funds have generated with respect to the Nifty 500 TRI index, using the rolling returns for multiple time periods. The data from 1 September 2018 to 1 September 2023 was considered, and rolling returns have been worked out at a weekly interval using the daily NAV data. The number of days in which a fund has generated positive weekly excess returns (fund return greater than Nifty 500 TRI index return), as a percentage of the total number of trading days during a given time frame, is calculated. For instance, Aditya Birla Sun Life Flexi Cap Fund reported positive rolling weekly excess returns on 134 out of 248 trading days (or 54%) in the past year.
Equity diversified funds with positive excess returns
With a robust asset mix, these funds generated positive excess returns across multiple time frames.
In other words, the fund delivered weekly returns that were higher than Nifty500 TRI weekly returns for 54 out of 100 trading days in the past year. Such percentages have been calculated for 108 equity diversified funds that are more than five years old. Moreover, the percentages have been worked out for multiple time periods: one, two, three and five years. A wide range (high minus low) was observed in such percentages across time intervals, which indicates extensive variation in the return generation by funds, relative to the market benchmark. To identify funds that The Economic Times Wealth September 11-17, 2023 11 mutual funds performed better on excess returns, those that maintained the positive excess return percentage in the top 25 percentile of the mutual funds’ universe (or ahead of 75% of the universe), in all the defined time periods, were screened. The fund universe is of 108 funds and nine funds were identified.
Attributes of shortlisted funds
The combined AUM of these nine funds stood at Rs.1.72 lakh crore at the end of July 2023 and grew by 50.1% y-o-y. Comparatively, the combined AUM of 146 equity diversified funds grew at 29.4% y-o-y during the same period. The shortlisted funds have also scored well on the risk-adjusted metrics. The average Sharpe and Sortino ratios of these nine funds have been 0.13 and 0.2, respectively, in the past year, against the category average of 0.01 and 0.14. While Sharpe ratio measures the excess return that a fund generates relative to the total risk (market and company specific), Sortino ratio measures the excess return relative to the downside risk. Most of the shortlisted funds have done well in terms of trading costs.
9 outperformers that have beaten the market benchmark
The percentages of these equity funds are better than 75% of the 108 funds across time intervals.
The average portfolio turnover ratio of the group was 39.2%, compared to the category average (equity diversified funds) of 58.8%. Seven out of nine funds had turnover ratios lower than the category average in July 2023. The portfolio turnover ratio reflects the percentage of portfolio holdings changed in a year. A higher ratio means more trading costs, which affects expense ratios and returns. Looking at the portfolio composition, HDFC Bank, Bharat Electronics, Hindustan Petroleum, Zee Entertainment and Ipca Laboratories were among the stocks held by most of the shortlisted funds in July 2023. In terms of concentration of AUM in the top five holdings, six have a lower concentration risk against the category average. In terms of sectors, banking & finance, capital goods, automobiles, healthcare and chemicals were among the favoured sectors of most of the shortlisted funds in terms of the number of shares held in July 2023.
