Category: Investing Insight

Cycles usually turn and the most hated sectors end up bouncing back and out-performing the broader markets. Does the same apply to actively managed mutual funds? Should you bet on the asset manager’s luck turning and getting off to the races? Here are some “broken” funds that maybe of interest.

Escorts Infrastructure Fund

Since 2007-09-21, Escorts Infrastructure Fund has returned a cumulative -38.19% vs. CNX 500’s +58.39%. This fund should get a bad-timing award, having launched in 26-Jul-2007, if MorningStar is to be believed (factsheet.) If you are bullish on Indian infrastructure, you may be better off buying the INFRABEES ETF. [stockquote]INFRABEES[/stockquote]

JM Equity Fund

I wonder what the holdings of this fund were in 2008? It lost -71.81% (CNX 500: -64.26%) in value during the crash and is yet to recover. Seeing how well it tracked the broader market, it might make sense to just hold a CNX 500 index fund instead of paying this manager to actively run your investment to the ground.

JM Basic Fund

Since 2006-04-03, JM Basic Fund has returned a cumulative 4.72% vs. CNX 500’s cumulative return of 117.04%.

Looks like the fund blew up pretty much every year of its existence.

HSBC Progressive Themes Fund

Something happened in Oct-2010 that permanently changed the course of this fund.

Since 2006-04-03, HSBC Progressive Themes Fund has returned a cumulative 36.18% vs. CNX 500’s cumulative return of 117.04%. And since 2013-01-01, the number is 25.73% vs. 31.98%.

Progressively losing client’s money.

Taurus Bonanza Fund

This fund was a bonanza for the asset manager who continues to charge 2.83% on Rs. 250.8M of assets (MorningStar.) Since 2006-04-03, Taurus Bonanza Fund has returned a cumulative 51.66% vs. CNX 500’s cumulative return of 117.04%.

It is yet to recover from the 2008 crash and you are probably better off buying a CNX 100 or CNX 500 index fund instead of chasing this bonanza.

Conclusion

It is said that there is a lot you can learn from studying failure. By looking at the track records of these broken funds, I think the key take-away here is that buy-and-hold only works if you (a) understand what it is that you are holding, and (b) stick to a strict re-balance frequency. Moreover, betting on reversion to mean might only work if you are betting that an out-performing manager will fall back to mediocrity. The other direction is a tough ask.

You can run the comparison tool here: FundCompare
 
 
 

Many investors believe that more risk implies more returns. However, that is an over-simplification: more risk implies a higher probability of more returns (and a higher probability of loss, as well.) Higher risk also implies higher volatility. This graphic is probably the best illustration of the relationship between risk, volatility and returns.

As mutual fund investors, you may have come across the ICICI Prudential “Very Aggressive” and the “Very Cautious” funds. Lets compare their relative performance across different time horizons to further understand the relationship between risk, volatility and returns.

Since March 2008

Since 2008-03-03, ICICI Prudential Very Aggressive fund has returned a cumulative 56.24% vs. ICICI Prudential Very Cautious fund’s cumulative return of 53.30%. The 3% out-performance came with significant stomach-ulcer causing volatility.

It would require someone to have some serious testicular fortitude to hang-on to their investments after a 45% drawdown. It took the “Very Aggressive” fund more than a year to claw itself out of the hole. And many investors would have abandoned the fund during that period.

Here’s wealth chart:

Since March 2009

Boom!

Since 2009-03-02, “Very Aggressive” returned a cumulative 169.40% vs. the “Very Cautious” cumulative return of 41.37%. Max Drawdown: -13.81% vs. -4.70%.

Peace of mind came with a very high performance penalty.

Since March 2010

Since 2010-03-02, “Very Aggressive”: 50.02%, “Very Cautious”: 35.48%.

And This Year

Since 2010-03-02, “Very Aggressive”: 17.58%, “Very Cautious”: 7.54%.

Conclusion

The real risk, if you are investing for retirement, is the inability to maintain a certain lifestyle post-retirement due to inadequate savings. Ideally, your investments should be risk-seeking when you are young and risk-avoiding as you near retirement. You can use a set of funds to reflect this attitude towards risk. And there is almost never a “one-size-fits-all-5-star-gold-plated” fund that you can remain invested forever.

You can run our very own comparison tool: FundCompare to see how different funds performed over different time frames, indices and other funds.
 
 
 
 

With the consensus on RBI rate cuts beginning next year, investors have been lapping up long-term government bonds (gsecs or gilts, if you wish.) The long-end has been bid so hard that the yield curve is flat as a pancake.

GSec Total Return Indices have tracked this, except for the hiccup back in May last year.

Short-term:

Medium-term:

Long-term:

Drawdowns

May’13 was a rude reminder to investors who thought that you cannot lose money investing in government bonds. You can. Investors in the long-end of the curve are yet to recover from the drawdown last year.

Should you expect actively managed gilt funds to do better?

UTI – GILT ADVANTAGE vs. ICICI Prudential Long Term Gilt

UTI’s fund has a much shorter duration compared to ICICI’s (4.1 vs. 7.35 years.) And the returns that the funds have posted exemplify the importance of incorporating the fund portfolio’s duration into your decision making.

Since 2012-01-05, UTI – GILT ADVANTAGE-LONG TERM has returned a cumulative 24.59% vs. ICICI Prudential Long Term Gilt Fund’s cumulative return of 20.16%.

UTI – GILT ADVANTAGE vs. Birla Sun Life Gilt Plus

Since 2012-01-05, UTI – GILT ADVANTAGE has returned a cumulative 24.59% vs. Birla Sun Life Gilt Plus’s cumulative return of 14.79%. And BSL’s fund is yet to recover from the May’13 drawdown.

UTI – GILT ADVANTAGE vs. HDFC Gilt Fund-Long Term

Since 2012-01-05, UTI – GILT ADVANTAGE has returned a cumulative 24.59% vs. HDFC Gilt Fund-Long Term’s cumulative return of 22.01%. Of the three funds we compared, this is the closest any gilt fund has come to matching UTI’s returns.

UTI – GILT ADVANTAGE vs. GSEC SUB 3-8 TRI

Since 2012-01-05, UTI – GILT ADVANTAGE-LONG TERM has returned a cumulative 24.59% vs. GSEC SUB 3-8’s cumulative return of 18.55%. The fund beat the sub-index hands-down.

Conclusion

It looks like the UTI Gilt Advantage fund is a well managed fund that has beat its peers and benchmarks. But as the standard disclaimer reads, “past performance does not necessarily predict future results.”

You can run the comparison tool here: FundCompare
 
 
 

Ideally, Index Funds should just track an index. Its the holy-grail of passive indexing – don’t try to be smart picking stocks, just invest in an index tracking fund and let the market work for you. Index Funds are supposed to only focus on reducing tracking error and fees. The NIFTYBEES ETF does the job pretty well:

Since 2005-01-03, Goldman – Nifty ETF has returned a cumulative 275.22% vs. CNX NIFTY’s cumulative return of 278.36%. Chalk up the difference to asset management fees. But the story with Index Funds offered by leading AMCs is a head scratcher.

IDFC Nifty Fund

Since 2010-05-03, IDFC Nifty Fund-Regular Plan-Growth has returned a cumulative 61.17% vs. CNX NIFTY’s cumulative return of 51.62%.

LIC NOMURA MF Nifty Index Fund

Since 2010-01-04, LIC NOMURA MF Index Fund-Nifty-Growth has returned a cumulative 54.78% vs. CNX NIFTY’s cumulative return of 52.95%.

Taurus Nifty Index Fund

Since 2010-06-21, Taurus Nifty Index Fund – Growth Option has returned a cumulative 46.82% vs. CNX NIFTY’s cumulative return of 52.06%. Oops!

IDBI NIFTY Index Fund

Since 2010-06-30, IDBI NIFTY Index Fund Growth has returned a cumulative 49.48% vs. CNX NIFTY’s cumulative return of 52.25%.

Question

If the NIFTYBEES ETF can track the index with a 0.09% tracking error and an expense ratio of 0.5%, why would anybody invest in any of the NIFTY Index Funds?

You can run the comparison tool here: FundCompare