According to the CRISIL AMFI Factbook released on Tuesday, active funds outperformed benchmarks over most time periods ranging from three to 10 years. The outperformance is also seen in most equity fund categories, including large-cap, large-and-mid-cap, multi-cap, mid-cap, small-cap, equity-linked savings schemes, focused and value/contra funds.
The report’s findings are different from the more commonly cited S&P Dow Jones SPIVA report, mainly because the two reports follow different methodologies. However, out of the two, the CRISIL AMFI report is more popular. We explain why.
The S&P Dow Jones SPIVA report gives the percentages of funds which are beating their benchmarks over different time periods. According to the 2018 SPIVA report, 36% of large-cap funds beat their benchmarks over the past 10 years. This figure falls to just 9% over the past three years. In case of mid- and small-cap funds, 45% beat their benchmarks over the past 10 years. The figure remains broadly stable at 44% over the past three years. However, in both cases, the percentages are short of 50%. This means an equity fund chosen at random will, on average, not beat its index.
However, experts have criticised the S&P Dow Jones SPIVA report on two grounds. First, they say, that the SPIVA report is biased by the recent underperformance of actively managed funds over the past 12-18 months. If you exclude this period, the percentage of outperforming funds will surge dramatically. Second, they say that the SPIVA report does not weight the funds by assets; it simply counts the number of outperformers. The majority of retail investors are in a few big funds and these are beating the index.
The CRISIL AMFI gets around both these issues. It does so by constructing indices of actively managed funds which are weighted by assets. Let’s understand this with an example. Let’s say there are just two funds, A and B in a category, and they have assets of ₹90 and ₹10 respectively. A weighted index will average out the returns of both the funds but after weighting them in a 90:10 proportion. This gives a fairly accurate, albeit abstract idea of how actively managed funds are doing. The CRISIL report gets around the second criticism—being biased by a particularly bad or good year by using rolling returns. Rolling returns are a method of accounting for inflows and outflows in different periods. For example, one looks at returns between 1 January 2015 and 1 January 2016, 1 February 2015 and 1 February 2016 and so on. The report finds that large-cap funds (as represented by the CRISIL-AMFI Large Cap Fund Performance Index) gave rolling returns of 13.85% over the past three years, more than the 13.27% given by the Nifty 50 and 13.40% by the Sensex. In case of a 10-year horizon, the active funds index gave 13.26% compared to 12.56% for the Sensex and 12.43% for the Nifty 50. In case of small-cap funds, the outperformance in the CRISIL AMFI Index is dramatic. Active funds gave 23.63% over the past three years compared to 13.16% by the Nifty Small Cap 100 and 13.49% by the S&P BSE Smallcap. In case of a seven-year period (it does not have 10-year data), the active funds index gave 21.25% compared to 11.97% for the Nifty Smallcap 100 and 11.77% by the S&P BSE SmallCap.
Although the CRISIL AMFI report follows a more long term and rigorous methodology, it is evident that the outperformance of active funds is waning, especially given returns over the past one to two years. The S&P Dow Jones SPIVA report may simply be a leading indicator of what is to follow in the longer term data examined by CRISIL. Should you shift from active funds to passive funds now? The answer depends on the risk you are willing to take. A well-managed active fund can beat the index but a poorly managed one can underperform by a huge margin. However, you should not base your decision solely on the SPIVA report. “The starting point bias in the SPIVA report and the lack of asset weighting render it liable to questioning. Active funds have outperformed and until India reaches the maturity of the US market will continue to do so. In addition, investing in index funds or ETFs will not give you the exact returns of indices. There is expense ratio and tracking error involved," said Amol Joshi, founder, PlanRupee Investment Services.