Best Equity Mutual Funds for Any Season
Sucheta Dalal
18 Oct 2012
Top 20 schemes selected using an improved methodology. These equity schemes have done well in the past, in terms of generating returns as well as holding their ground in a sliding market. A report by Jason Monteiro
Jason Monteiro
Most equity mutual fund schemes would have found it difficult to give decent returns in a market that has been going sideways for a long time now. While the Sensex is around 18,600 currently, the fact is that it was around the same level in January this year and in July 2011, though these levels are 15%-20% higher than the lows the market hit late last year. It is in markets like these that good quality stock-picking by fund managers should stand out.
There are about 400+ equity schemes to choose from with different objectives and investing patterns. How would you choose? To realise the difficulty of choosing, consider the performance data of large-cap and multi-cap schemes of more than five years. The year-end returns of these schemes would be as volatile as those of the Sensex. The top 20 schemes of this category returned 15.87% whereas the bottom 20 schemes returned 6.11% for the period September 2011 to 18 September 2012. Considering all the 123 schemes more than five years, as many as 48 schemes delivered a return of less than 10%.
This is where Moneylife’s analysis comes in. The 20 schemes that we selected last year (see Cover Story, Moneylife, 6 October 2011) returned an average of 11.65%. The schemes ranked among the top 10 delivered an average return of 12.39%. Though these are returns for just one period and may look biased, the schemes we have selected have done well in different periods over the long term as well. Our recommendation is simple: choose schemes that are high on performance through all periods and more so in declining markets. Most equity schemes do well in a bull market run and fall nearly as much, or more, when the market declines. Therefore, if you know that a scheme has done well earlier not only in good times but also when the market has fallen, it would be a scheme worth investing in.
This is the fifth time we are presenting this unique analysis. The schemes we had selected in the past four years have done well. Moneylife strives to give its readers the best and, hence, each year we fine-tune our core methodology to select the best schemes. This year, again, we provide you with 20 schemes—of these, as many as 12 schemes are common to last year’s list.
The 20 schemes of this year’s list come from 12 fund houses. Take a look at the schemes on our list and read about what makes them better than the rest. If you have read our Cover Story “Best Fund Houses” (Moneylife, 28 May 2012), we mentioned that fund houses usually employ the same winning strategies across all schemes. Therefore, we find multiple schemes coming from the same fund house even though their objectives may be different. Hence, we have clustered the 20 schemes according to fund houses.
HDFC Mutual Fund: Two or more schemes of HDFC MF have always made it to our list in each of the previous years. This year, we have as many as four schemes of this fund house on our list. HDFC Equity, HDFC Growth and HDFC Top 200 have been a part of our list for the last three years; this year, they have been joined by HDFC Capital Builder. These schemes have delivered an annualised mean monthly return of 13.26%, 14.11%, 13.79% and 13%, respectively. HDFC Capital Builder may be lower on returns but it has done better than most schemes during market declines. All four schemes have significantly beaten their benchmarks in all the rolling periods. Each of these schemes has a different objective. HDFC Equity’s objective is to invest in high growth companies whereas HDFC Growth invests in medium- and large-sized companies with a focus on long-term growth. HDFC Top 200 is another large-cap scheme which invests in stocks from the BSE 200 and from the 200 largest capitalised companies. But how come the performance of these schemes is similar? Because their portfolios have the same stocks. The top four holdings of these three schemes include State Bank of India, ICICI Bank, Infosys and ITC but with different weightages. Even the remaining part of their portfolio is similar.
HDFC Capital Builder’s objective is to invest in stocks that are priced below the fair value which makes it a value-based scheme. This scheme has done well when the market has declined. Take, for example, the three-year period ending 30 December 2010. Its benchmark fell by 2.97% but the scheme was able to gain 3.59% in this period of decline. In the past 29 monthly periods when the market has declined, the scheme outperformed its benchmark in 22 periods. Reliance Industries and Ipca Laboratories make up around 10% of the portfolio.
UTI Mutual Fund: Badly managed and bailed out twice in the past, UTI has turned around very well in the past few years possibly because its fund managers now have the freedom to invest freely. Among the 11 odd schemes of UTI MF, four to five have been doing well. Last year was the first time a scheme from UTI made it to our list, namely, UTI Dividend Yield Fund. At that time, we had mentioned that the
performance of its schemes has been improving steadily and it certainly has. This year, we have two more schemes from this fund house—UTI Equity Fund and UTI Opportunities Fund. UTI Dividend Yield Fund, which was a part of our list, delivered a mean return of 15.48%. UTI Opportunities Fund and UTI Equity Fund returned 14.84% and 12.52%, respectively. All three schemes are large-cap oriented. UTI Dividend Yield invests in stocks with a high dividend yield. UTI Equity Fund invests in a diversified portfolio of growth stocks whereas UTI Opportunities Fund tries to capitalise by investing in stocks based on the opportunities generated by the changing economy.
Are the portfolios different? The top four picks of UTI Dividend Yield are the same as those of the HDFC MF schemes—State Bank of India, ICICI Bank, Infosys and ITC. And then there are NTPC, Ambuja Cements, Grasim Industries, Hero Motocorp and GlaxoSmithKline Pharma which make up the rest of the portfolio. UTI Equity has Sun Pharmaceuticals, HDFC Bank, Tata Consultancy Services, Reliance Industries and Nestlé India in the top picks of its portfolio. The new names in the top picks of UTI Opportunities are Larsen & Toubro, HDFC, CRISIL and Cairn India. UTI Dividend Yield and UTI Opportunities have done well to negotiate the declining markets. UTI Dividend Yield is being managed by Swati Kulkarni since December 2005 and UTI Opportunities is being managed by Anup Bhaskar since July 2011. Anup Bhaskar has also been managing UTI Equity since April 2007.
Birla Sun Life Mutual Fund: A couple of schemes of Birla Sun Life Mutual Fund have always made it to our list of schemes, except last year, when there was only one—Birla Sun Life Frontline Equity Fund. This year, a new scheme from the fund house joins the list—Birla Sun Life Dividend Yield. It returned a good 15.04% in the monthly periods. This scheme has done well in declining markets as well, ranking fifth. Barring ITC, its top picks are quite different from the other mutual fund schemes: ONGC, Tata Motors, Bajaj Auto, Hexaware, Glaxo Consumer and Castrol India. Birla Sun Life Frontline returned 13.78%. This scheme has been on our list on three out of four occasions and this is the second year in a row for the scheme. Its portfolio holdings are not that different from those of other schemes. It is overweight on ITC and ICICI Bank.
ICICI Prudential Mutual Fund: The schemes of ICICI Prudential MF are rarely present on our list. ICICI Prudential Dynamic did well to make it to our list last year and is present on this year’s list as well. The scheme returned a reasonable 13.65% in the monthly periods. The scheme, being dynamic in nature, has done just about ok in the bear market periods, ranking 14. Sankaran Naren who was the fund manager of the scheme from September 2006 to February 2011 has, once again, taken over the reins since February 2012 along with Mittul Kalawadia, who has an experience of just three years as an equity analyst. The top picks of this scheme include Bharti Airtel, Reliance Industries and Infosys which make up 25% of the portfolio. The other stocks among its top 10 include Wipro, United Phosphorus and Sterlite Industries.
The other scheme from ICICI Prudential MF on our list is ICICI Prudential Discovery which invests in a well-diversified portfolio of value stocks. This scheme ranks higher as it has done well in terms of returns and market downturns. The top picks include Bharti Airtel and Reliance Industries. The other picks are Amara Raja Batteries, Sterlite Industries and Oracle Financial Services Software. Most of its ‘value’ picks comprise small- and mid-cap stocks which one should keep in mind if planning to invest in this scheme.
Reliance Mutual Fund: Reliance MF is another fund house whose schemes keep appearing on our list. Most of the schemes from Reliance MF have done reasonably well in terms of returns but have failed to sustain their performance when the market declined. Reliance Equity Opportunities is one such which has done well in normal markets but was not among the best when the market dived. With an objective similar to that of UTI Opportunities, this scheme returned 14.91% in the monthly periods. Nearly 25% of its portfolio is invested in four stocks—Divi’s Laboratories, HDFC, Trent and State Bank. Other unique picks in its top 10 holdings include Maruti, Shoppers Stop and Cummins.
Another scheme which made it to this list, and was present in last year’s list as well, was Reliance RSF Equity. This scheme delivered a return of 15.64% in the monthly periods but the returns took a significant hit during market declines. Divi’s Laboratories tops the list of the top picks of the scheme. Other unique stocks in its top 10 portfolio are: Oracle, United Spirits, Motherson Sumi Systems, Torrent Pharmaceuticals and Apollo Hospitals.
Schemes of Other Fund Houses
Dividend-yield schemes have done well in the past few years. But as we explained in a recent issue (Moneylife, 22 August 2012), dividend-yield schemes are just better quality equity diversified schemes. The top 10 holdings of these schemes are not very different from those of other equity diversified schemes. All the stocks in their portfolio have strong fundamentals but do not necessarily give high dividends. There are four such schemes on our list. We have mentioned two of these earlier; the other two are ING Dividend Yield and Tata Dividend Yield.
ING Dividend Yield is one of the better performing funds of ING MF. In terms of equity assets under management, ING MF does not rank in the top 20 on the list, though it has four schemes that have been running for five years now. In terms of returns, the other schemes from this fund house do not score high on the list but ING Dividend Yield managed to stand out from the rest. This scheme has delivered a return of 15.48% in the monthly periods. It has done well during market declines—ranking 9th among the entire list of schemes. However, Ankur Arora, an IIM graduate who was managing the scheme from December 2009 to February 2012, has resigned to join IDFC MF as a fund manager. The scheme is now being managed by Danesh Bharucha who has been with ING MF since 2008. We would suggest more research before investing in this scheme. Tata Dividend Yield was present in our list last year as well. This scheme has returned 14.83% in the monthly periods. There are eight equity schemes of Tata Mutual Fund which have been in existence for more than five years—six of these fall in the large-cap and multi-cap category. Of these six, four are among the top 50 with Tata Dividend Yield topping the list. Its top five holdings, which include Infosys, CRISIL, Hero MotoCorp, Hindustan Unilever and Glaxo Consumer Healthcare, make up 27.64% of the scheme’s portfolio.
Other schemes that deserve a look are: Canara Robeco Equity Diversified, DSP BlackRock Top 100 Equity, Franklin India Prima Plus and Quantum Long-Term Equity. All four have done reasonably well in terms of long-term performance and during market declines. Ravi Gopalakrishnan recently took over the reins of Canara Robeco Equity Diversified from Soumendra Nath Lahiri who was managing the scheme for over a year. Ravi was earlier with Pramerica as CIO-Equities and Soumendra has moved on to L&T MF. The fund management of DSP BlackRock Top 100 Equity has been steady. Apoorva Shah has been managing the scheme since April 2006. The scheme has returned 13.80% in the monthly periods. Its top picks are not very different from those of other top schemes.
Quantum Long-Term Equity makes it to our list for the second year in a row, delivering an annualised mean monthly return of 14.01%. As we mentioned last year, it sells its funds directly without any middlemen and its fund management has done well too. It has an expense ratio of just 1.25%—half of the maximum allowed for equity diversified schemes and 25 bps lower than the maximum allowed for index schemes. Its top five picks constitute 30.65% of the total assets. The fund management has been stable as well, with Atul Kumar managing the scheme since November 2006.
Fidelity Equity Fund has performed well in the past and much of it is due to its fund management which included Sandeep Kothari, a highly experienced fund manager. The buyout of Fidelity MF by L&T MF did not include its fund management team. With the fund management set to change soon it is difficult to hazard a guess about the future prospects of the scheme.
A Unique Approach
We have improved our methodology over the previous year’s. Here are some salient features of the method applied this year:
• We considered schemes that were launched on or before 30 August 2006. Taking a longer period helps to identify a scheme that has performed over different market cycles and most large fund houses had already launched their schemes by then.
• This gave us a sample of 122 equity diversified growth schemes. This list contains different categories of schemes based on their investment objective—like small-cap schemes, mid-cap schemes, large-cap schemes, contra funds, dividend yield schemes, etc. Small- and mid-cap schemes do well in a bull market and the returns are decimated in a market downturn. Our research on contra funds in 2006 showed that there is nothing contra about them.
• Therefore, we kept in the sample schemes belonging to categories that are less volatile in nature—large-cap schemes, multi-cap schemes, dividend-yield schemes and value-based schemes. We kept dividend-yield and value-based schemes as they invest more like multi-cap schemes. This brought our list down by 30 schemes to 90 schemes.
• That was the easy part. We then took the geometric mean of the monthly returns of the schemes from 1 August 2006 to 30 August 2012 (73 months) and ranked the schemes accordingly.
• We then compared the schemes’ performance with respect to their benchmarks. This is taken as the mean percentage of outperformance or underperformance compared to the benchmark. The higher the percentage, the better. We, thus, got a performance ranking.
• We also needed to know how a scheme performs when the market declines. We identified 29 such monthly periods when the Sensex delivered negative returns. Here, again, we judged the schemes according to their performance compared to their benchmark in the 29 relevant periods. The higher the percentage outperformance, the better is the ranking. We then calculated the composite rank of the schemes by giving 50% weightage to the mean monthly return and 25% each for the performance in relation to the benchmark during all the periods and for performance in relation to the benchmark in declining periods.
How is our methodology different?The metrics used by most fund analysts is over a fixed period —also called point-to-point analysis—and that too for one year, three years and five years. We believe this is flawed because funds will show up as good or bad only for that specific period (read Earning Curve, Moneylife, 4 October 2012). We avoid this flaw by not considering returns over a fixed period. This removes the bias for any scheme which may have performed well in just one period. Secondly, we do not take the arithmetic mean but the geometric mean of the returns over different periods. Geometric mean removes the bias if a scheme has performed extremely well only in one or two periods and has delivered mediocre returns in the remaining periods. We then give weightage to the performance of the scheme compared to its benchmark. Though one may argue that schemes select the benchmark that suits them, more than 92% of large-cap and multi-cap schemes, appropriately, choose the Nifty, the Sensex, BSE 100, BSE 200 or CNX 500 as their benchmark. And, most important, we judge the performance of the scheme during market declines. Most schemes would do well when the market goes up but what if the market dips? Comparing the returns to the benchmark in such periods gives a better assessment of risk. According to us, these four factors, put together, create the best model of fund performance analysis which you will not find in any other analysis.