The inconsistencies of a ‘consistent fund’
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How many times have you heard your distributor, financial adviser or fund house say “Invest in this scheme, it is a consistent performer”? Consider this: till the end of September 2016, ICICI Prudential Multicap Fund (formerly ICICI Prudential Top 200 fund) had given top-quintile performances in the past 1-, 3-, 5- and 7-year periods compared to its peers.
However, between 2005 and 2015, it finished in the top quintiles in only 3 out of 11 calendar years. We’re not saying it’s a good or bad fund. But, if numbers can be polished, they can surely be massaged well enough to give a picture that may not be entirely accurate. So, what really is a consistent performer?
To compare it with peers…
Although past performance is not a guarantee for future returns, it is a good starting point. But then, what sort of returns should we see? Should you see the returns across multiple time periods? On that parameter, schemes like ICICI Prudential Multicap and, say, Principal Growth Fund should be screaming buys. Principal Growth Fund returned 27% and 20% over the past 3- and 5-year periods and finished in the top quintile. Again, if you see Principal Growth Fund’s calendar year returns between 2005 and 2015, it came in the top quintile only twice (2012 and 2013). In fact, in 2005, 2007, 2008, 2010 and 2011, it featured in the bottom quintiles when compared to its peers.
Experts say that rolling returns are a better way of checking consistency. You take a series of 3- or 5-year (or something similar) returns, at the end of every month or quarter, over a long period of time, and then check the consistency.
Take DSP BlackRock Equity Fund’s example. End of this September—with 6-month return of 20% and 1-year return of 15%—it came in top quintiles. Does that mean it is consistent? We checked its rolling return: 3-year returns taken over June 2006 till date.
Of the 30 such points we took, it came in the bottom quintile in four consecutive 3-year periods, and was a middle-rung performer in 16 periods. In the remaining 10 periods it stood in the top quintile (the last such 3-year period ended September 2011). The fund may be on a turnaround given its good recent performance, but checking for multiple periods shows cracks in its long-term performance.
“Purely focusing on the point-to-point returns doesn’t make sense because investors don’t exactly enter and exit on the days that are advertised in such advertisements and communications,” said Deepak Chhabria, chief executive officer and director, Axiom Financial Services Ltd, a Bengaluru-based distributor of financial products.
…or with benchmark indices?
Fund houses are only too happy to say that they have outperformed the benchmark. For instance, as on September-end, DHFL Pramerica Large Cap Fund outperformed its benchmark Nifty 50, across 1-, 2-, 3-, 5-, 7-and 10-year time periods. Surely, that’s outperformance by a wide margin. Or is it?
Between 2004 and 2015, it outperformed Nifty50 only in 7 calendar years. Is that good? Compared it to peers, and you realise that it may not be amongst the best options around. Of the thirty 3-year time periods we looked at, it finished in the top quintile in only five. In 13 of these periods, it was in the bottom quintile. “In India, many diversified funds have outperformed their benchmark indices consistently as lot of companies outside the index offer alpha-generation opportunities,” said Kunal Valia, director, Credit Suisse Securities India.
Return is never the only thing you consider when picking a mutual fund scheme. A large part of your decision should also involve looking at the fund manager’s track record. A scheme may sport high returns, but are such returns coming on the back of higher risk? For instance, a multi-cap fund is meant to invest in stocks and sectors across market capitalisation. Typically, such funds invest a significant chunk in large-sized companies. But if it invests more in small-sized companies consistently, it is aggressively managed. Take the case of Reliance Vision Fund, a multi-cap fund. Based on its allocations, Value Research changed its category from multi-cap to mid-cap in September 2013. In March 2014, it changed the scheme’s category back to multi-cap.
A mid-cap oriented scheme from one of India’s largest fund houses went aggressive on finance companies and invested about 28% in non-banking finance companies by the middle of 2014, up from zilch in 2013. That may have been a conscious strategy, but an analyst who did not want to be quoted said: “It is discounting some very aggressive growth, which could prop up returns, but it also increases the risk profile immensely.” Shyam Sekhar, founder, ithought, a Chennai-based MF advisory firm agrees: “I would focus more on risk. If the fund manager is taking more risk to give returns, such returns may give you an illusion of consistency but could backfire later.”
What should you do
We are not encouraging you to take a long- or short-term course in portfolio management. But you need to be able to ask the right questions the next time your fund house or adviser calls a fund a consistent performer.
Consistency is not about just returns, it’s about the soundness of a fund’s strategy. Sekhar says, if a fund manager invests in some scrips or sectors as part of a thought-out strategy, she shouldn’t exit in haste if the strategy doesn’t work out in the short term. That conviction is required and that is consistency.