Mumbai: The S&P Dow Jones SPIVA report, which was released on Tuesday, shows that 77% of large-cap funds, 81% of ELSS funds and 19% of mid- and small-cap funds have underperformed their respective benchmarks over the year ending in June 2019. Over a 10-year period, the proportion of underperforming large-cap funds dropped to 61% and proportion of underperforming ELSS funds dropped to 46%. In case of mid- and small-cap funds, the proportion of underperformers actually rose to 49%. However, compared to the last SPIVA report, which was released in December 2018, all three equity fund categories have improved their performance over a one-year period.
The SPIVA report findings must be viewed with caution due to two methodological issues. First, the comparison is done on a trailing basis rather than a rolling basis. As a result, the percentage of underperformers keeps shifting depending on what point of time you look back from. Second, the study simply counts the number of funds being beaten by their benchmark and calculates their percentage in comparison to the total number of funds in the category. It does not give the number of underperformers on an ‘asset-weighted’ basis which accounts for the size of the fund. As a result, smaller badly managed funds can affect the result.
The SPIVA report does give the average returns (although not percentage of underperformers) of asset-weighted funds and these are typically higher than equal-weighted returns. For example, the one-year return of large-cap funds is 9.34% (asset weighted) compared to 7.75% (equal weighted). The three-year return of large-cap funds is 11.88% (asset weighted) compared to 11.34% (equal weighted). That being said, a comparison of average returns of asset-weighted equity mutual funds to their benchmarks does not dramatically change the picture of underperformance in the past five years.
The SPIVA report, although subject to methodological issues, does highlight the growing problem of underperformance by actively managed funds. Were these trends to continue, investors may shift to passively managed funds (index funds and ETFs). Large institutional investors such as EPFO have already chosen the ETF route.
In addition, the SPIVA report also publishes figures for survivorship (how many funds in the category actually existed in the given period) and style consistency (how many stayed true to a particular investment style). The 10-year survivorship rate for large-cap funds is 68%, for ELSS funds is 91% and for mid- and small-cap funds is 64%. Style consistency is much lower at 17%, 91% and 26% respectively but this issue has been addressed substantially by the October 2017 Sebi Categorization of Schemes. Funds must now adhere to the Sebi-defined bucket in which they are classified.