When you hand over your hard-earned money to people who claim to be professionals in managing money, it pays to stick to the best. Better still, it makes sense to stay invested in consistent performers.
So much for picking and choosing schemes, but sticking to fund houses that come with a good pedigree is also important. Typically, a good pedigreed fund house is one with most of its schemes doing well and not just one or two. A fund house with a large basket of good performers instills confidence. That is where Morningstar Fund Awards 2009 come in.
Also See Award List (Graphic)
What is it about?
Morningstar awarded top honours to nine schemes in their respective categories and culminated the evening by awarding the best equity fund house and best debt fund house to HDFC Asset Management Co. Ltd and ICICI Prudential Asset Management Co. Ltd, respectively.
Care has been taken to choose fund houses with substantial weight. Hence, one of the award guidelines makes it mandatory for fund houses to have at least 10 funds to be considered for either of the two categories.
Further, consistent track record is important. Only those funds that have completed three years have been accounted for. This assumes additional significance for Morningstar Awards as the past three years have been very volatile for equity markets. If 2007 saw markets rising to unprecedented levels, 2008 saw them come crashing down on the back of global liquidity crisis that also caught all mutual funds unawares. Then, 2009 saw a global recovery that catapulted all equity funds back in the green.
Schemes that did well in both falling and rising markets came out trumps. Also, the ones that converted their excess cash levels and bought equities before the markets started rising from March 2009 got the benefit of the upside. A fund that performs well across all market cycles bodes well for investors. This was one of the main reasons why HDFC AMC took away this year’s best equity fund house award.
Similarly, debt markets saw interest rates rising and falling in the past two years. Predicting the duration correctly is important for a debt fund and that is where our best debt fund house winner, ICICI Prudential AMC, scored the most.
It’s not just returns that Morningstar recognizes. How well a fund manages its risks, such as volatility and downside, is equally important.
All funds that came out on the top were judged based on their risk-adjusted performance. Here’s where consistency comes in. Rather than picking and choosing a fund that gives superlative performance in one year and then falls miserably in the next, prudent investment norms suggest picking funds that show consistent performance, adjusted for their risks.
It’s important to judge a fund house based on the performance of their basic and core schemes. Since these schemes appeal to a wider section of the investing community, it’s essential that the core schemes’ performance is accounted for. Therefore, Morningstar Awards 2009 avoided sector, global, arbitrage, short government, floating rate and fixed maturity plans.
Since the awards are annual, Morningstar believes it is appropriate to emphasize a fund’s one-year performance. However, we do not wish to award funds that have posted a strong one-year return, but have not delivered in the long run.
The awards methodology emphasizes on the funds’ one-year performance but, at the same time, mandates that funds should also have delivered strong three-year risk-adjusted returns within the awards peer group.
MORNINGSTAR CATEGORY AWARDS
These awards are given to funds with the best risk-adjusted performance within their Morningstar groupings of Morningstar categories, subject to qualitative review.
Only funds that are recorded in the Morningstar database as available for sale in a given market will be eligible to receive an award in that market. Insurance funds and closed-end funds have been ignored.
The smallest 10% of funds in assets under each Morningstar category are excluded from the awards based on the latest December-end portfolios. In lieu of this measure, funds with less than Rs50 crore in assets as of 31 December or the nearest date for which the figure is available have been excluded.
Categories eligible for the awards
The awards are given in the following categories.
Equity: Large-cap, small/mid-cap, equity-linked saving schemes (ELSS, tax-saving)
Allocation: Moderate, conservative
Fixed income: Ultra-short bond, short-term bond, intermediate/long-term bond, intermediate/long government
Categories excluded from the awards
Sector funds, global funds, arbitrage funds, short government, floating rate funds, fixed maturity plans
• Each fund in a relevant group scores as follows:
• Returns score = 80% of the total score, as below
• One-year returns: 25% of the total score, based on one-year return percentile rank in Morningstar category.
• Three-year returns: 55% of the total score, based on three-year return percentile rank in Morningstar category.
• Risk score= 20% of the total score, based on three-year Morningstar risk percentile rank in Morningstar category.
Weights: Based on above weights, the effective weight of each year in the calculation is as follows, including both risk and return (figures are rounded to nearest whole number):
Past one year: 50%
Second year: 25%
Third year: 25%
Further, funds that have not outperformed their Morningstar category median in at least two of the past three calendar years have not been considered.
Based on the above scores, the 10 funds with lowest scores in each Morningstar award category were reviewed for the following qualitative checks:
Funds that are deemed inaccessible to local market investors and retail investors excluded
Funds where the portfolio manager has been in charge for less than one-year excluded
If an analyst has reasons to believe that a fund cannot continue to outperform, then such a fund would be removed from consideration after discussion with heads of the Morningstar research team
Any fund that is deemed to have deviated from its stated mandate not considered
All institutional share classes removed
MORNINGSTAR FUND HOUSE AWARDS
The Morningstar Fund House Awards recognize those fund families that have delivered sustained outperformance on a risk-adjusted basis across their fund line-ups. Here are the award categories and eligible groups.
Morningstar Best Equity Fund House Award: Fund houses with at least 10 open-ended equity funds with minimum three-year records in the Morningstar database are eligible.
Morningstar Best Debt Fund House Award: Fund houses with at least 10 open-ended fixed-income funds with minimum three-year records in the Morningstar database are eligible.
Those funds with three-year Morningstar ratings are eligible for inclusion in the scoring (see below). Thus, funds without three-year records or funds in unrated Morningstar categories are excluded from the scoring process.
For each of the above two groups, Morningstar will calculate a house score using the following methodology:
• Determine the three-year Morningstar risk-adjusted return (MRAR) for each share class of each fund run by a given house, and the percentile rank of that return score within its Morningstar category.
• Determine the average percentile rank of each fund’s MRAR by taking the mean MRAR percentile rank of all its classes.
• Determine the mean percentile rank of each fund house’s MRAR by taking the mean of its funds’ MRAR percentile ranks (the lower a group’s mean percentile rank, the better its performance).
• Adjust the score using the following probability function to compensate for the difference in fund house sizes. The adjustment enables us to account for the fact that the number of funds varies from one group to another and, therefore, makes it possible to compare the different mean scores of the competing groups.
Morningstar reviews the scoring results and may disqualify a firm if they do not offer retail shares or if there are extenuating circumstances. These might include (but are not limited to) the loss of a group of talented managers, substantial increases to fund expenses, non-availability of the house’s funds to retail investors in the relevant market, or being taken over by another group. Each disqualification would be approved by the heads of Morningstar’s research team. The review is intended to prevent giving an award on the basis of performance that we believe is unlikely to be repeated due to structural factors.
The remaining fund firms with the lowest score in each of the above groups will receive the relevant Morningstar Fund House Award. There will only be one award in each of the categories listed above. If there are fewer than three eligible groups in any of these categories, no award will be made in that category.
Graphic by Naveen Kumar Saini/Mint