Are active large cap mutual funds making a comeback?
Recently, actively managed large cap mutual funds have been criticised due to their underperformance vis-a-vis-passive funds. However, currently, six of the top 10 large cap mutual funds over one year are active funds. Should you invest in them?
Until two months ago, the top performing fund in the large-cap category were all passive funds, bar one. Currently, six of the top 10 performers over one year are active funds. From a one-year return perspective, Axis Bluechip, BNP Paribas Large Cap, LIC MF Large Cap, JM Core 11, DSP Top 100 Equity and Canara Robeco Bluechip Equity are all placed ahead of their index-based peers from the large-cap segment. Only Axis Bluechip was holding ground until a few months ago. While this reversal in fortunes is heartening, it is too early to say something, reckon experts. The number of outperforming active large cap funds—as a proportion of total schemes in the category—is still low; many continue to lag behind indices.
Experts say investors should monitor the performance for at least six months before coming to any conclusions. Kaustubh Belapurkar, Director-Fund Research, Morningstar Investment Advisor, insists this is too short a time frame to judge the merit of active large cap funds. “Investors will have to gauge performance over a complete market cycle. Sometimes, funds can catch a wave that may not reflect the realities.” Prableen Bajpai, Managing Partner, FinFix Research & Analytics, says, “The focus should be on staying invested during the market cycles and not on taking calls on short-term performance.”
One of the reasons why large cap funds have been struggling is the huge polarisation within the segment. Only a select few index heavyweights have seen a sharp uptick in share prices. However, given that the mutual funds tend to be more diversified, these stocks did not find the same representation in the funds as in the index. As a result, return profile of funds relative to the index suffered, while index funds that mirror the index gained. One argument is that more active large cap funds will start outperforming once the market rally broadens.
Active large cap funds making a comeback?
After lagging behind for many years, active funds now lead the performance charts.
Note: The above list of funds includes the top 10 perfomers from the large cap funds category. Source: Value Research. Data as on 10 Nov
But while the narrow market width may be a transient phase, there are other more persistent hurdles that large cap funds will continue to face. Since the change in rules last year, these funds now have to choose from a constrained universe of eligible stocks. Within the widely tracked basket of the top 100 stocks by market capitalisation, there is not enough information asymmetry to be able to consistently pick winners from this space. Further, the mandatory benchmarking to a total returns based index—which factors in dividends in index performance—also eats into the excess return of the funds. Besides, as index fund and ETF costs continue to go down, the cost benefits over active funds will give them an edge.
Notwithstanding these obstacles, experts insist that a few fund managers will continue to deliver alpha in the coming years. “There are inefficiencies in the indices that can be exploited by fund managers to generate alpha for investors,” reckons Bajpai. “There is still potential for alpha in active large cap funds but will be limited to a handful of offerings,” argues Belapurkar, stressing that the quantum of alpha from this space will diminish going forward.