After a long gap, the percentage of actively managed equity mutual fund schemes beating their benchmarks has improved due to dispersion in market performance.

Nearly 70-80 per cent of actively managed equity funds have outperformed their benchmarks over 10 years, while the share of equity funds beating benchmarks over five years and three years has improved to 55-60 per cent and 45-50 per cent against 35-40 per cent and 35-40 per cent logged last September.

The large-cap category is seeing recovery in alpha even as mid-cap and flexi funds are struggling while small-cap performance is moderating off on a higher base, said a Kotak Institutional Equities research.

Recent rebound in the performance of equity funds augurs well for the industry, even as the outperformance of active funds moves in cycles and is influenced by dispersion and market momentum, it said.

Most active funds with ₹20 lakh crore assets under management generated strong excess returns on average, suggesting that deviation versus benchmarks tends to reward investors with alpha. However, the analysis found industry’s share of highly active AUM remains at about 20 per cent with 30 per cent AUM in the bottom quartile. While differentiating versus benchmark is inevitable to combat passive substitution, highly differentiated positions can sometimes lead to performance issues and subsequent market share loss for AMCs, said the report.

While evidence from mature markets suggests decreasing returns to scale in active investing, the Kotak report said it is not sure if scale is prevailing over skill for Indian MF industry as yet.

MF ownership up

MF ownership in equity free float has risen to 17 per cent but has no correlation with ability to extract alpha. Further, the data on fund size versus tracking error/alpha gives an impression that even for large fund sizes, managers are able to differentiate versus the benchmark and deliver outsized alpha, it said.

Passive adoption is not only a function of the long-term alpha track record of active funds but also equally of distribution models that can accommodate low-cost ETFs or index funds. “We believe that India as a market will remain commission-driven over the medium term, which automatically restricts the runaway adoption of passive funds through the advisory route,” it said.

Though HDFC AMC and Nippon India AMC are well placed to benefit from strong fund performance, these stocks have limited room to benefit investors due to their high valuation.