THE BIG STORY. The best fund house of them all

Investors who put their faith in diversified equity mutual funds from the leading houses have been well rewarded over the past five years. If your portfolio featured only diversified equity schemes from the top 10 fund houses by assets under management, your returns would have easily beaten all of the key indices – the Nifty, CNX 500 and CNX Midcap index. These top 10 fund houses account for about 80 per cent of the total assets under management in the mutual fund industry.

This is in contrast to the situation three years ago. In 2011, only three of the top 15 fund houses stayed ahead of standard benchmarks across one-, three- and five-year time-frames. But which fund houses fared the best of them all? A BusinessLine analysis shows that across all their schemes, Franklin Templeton, ICICI Prudential and SBI Mutual figured on top, their equity funds delivering the highest returns over the past five years.

For the purposes of this analysis, we averaged the returns of all the diversified equity funds of each house over one-, three- and five-year periods and compared the averages to all three commonly used benchmark indices — the Nifty, CNX 500 and CNX Midcap.

The results show that equity funds which take active calls on stocks, instead of piggybacking on an index, did well by investors. Over the last five years, fund houses managing active schemes delivered 15-18 per cent annual returns, way ahead of the 11-12 per cent that the representative indices notched up over this period. Over one- and three-year periods too, fund houses performed better than the indices.

This doesn’t, however, mean that all the schemes of these asset management companies figured in the party. There were underperformers , but their numbers are still small. The chances of getting stuck with a dud are thus low, especially if holdings are over longer time-frames.

The last five years also saw the markets going through longer bull or bear periods, unlike in 2009, when a sudden spurt between March and May had caught many fund houses with cash positions off-guard. Over 2010-14, there has been enough time for asset management companies to take decisive calls or alter strategies.

Each of the top 10 asset management companies has 5-10 diversified equity schemes, which exclude sector, thematic or tax-saving funds.

The average returns of these schemes over one-, three- and five-year periods is taken to be the respective fund house’s returns for a particular time-frame. These average returns are compared to the indices.

According to this filter, all the top 10 fund houses have come out on top as they beat the Nifty, CNX-500 and CNX Midcap across all durations. These three benchmarks were considered because fund houses have schemes that feature large-, multi- and mid-cap stocks.

In all, these asset management companies offer 76 diversified equity schemes. Over all time-frames, 70-71 of these — or a healthy 92-93 per cent of the schemes — outperformed the benchmarks. Returns over periods more than a year are annualised.

Franklin Templeton came out on top as the best performing fund house. Schemes belonging to this AMC delivered the highest returns among the pack across various tenures.

Delivering 60.7 per cent, 24.7 per cent and 17.9 per cent returns over one-, three- and five-year time-frames, the fund house has been the best of the lot. The level of out-performance over longer time-frames is 5-8 percentage points for Franklin Templeton.

ICICI Prudential too follows closely, with similar levels of out-performance over the years.

Many others, such as SBI and Birla Sun Life, have also done well, beating the benchmarks significantly.

The largest of the lot, HDFC, too performed reasonably well, though it falls considerably behind in the pecking order.

IDFC, with 41.3 per cent, 18.3 per cent and 14.8 per cent returns over one-, three- and five-year periods, respectively, figures at the bottom of the pile, though as a fund house, it still beat all the benchmarks.

Even as this fund house-based analysis presents a pretty picture at the aggregate level, it is important to go deeper and check individual schemes to see if the overall picture is propped up by just a few sterling performers.

It is here that five fund houses stand out. In Franklin Templeton, ICICI Prudential, Birla Sun Life, UTI and Kotak Mahindra, all the schemes have outperformed indices over one-, three- and five-year time-frames. The benchmarks, as mentioned earlier, were based on the market cap bias of schemes.

Reliance, SBI, DSP BlackRock and HDFC have seen individual schemes failing at one time or the other, though the fund houses have had an otherwise good track record.

IDFC alone has a relatively ordinary performance record, with only two-three schemes from its basket of five funds outperforming across time periods.

For Franklin, its Prima Plus, Flexi Cap, Smaller Companies and High Growth Companies funds performed extremely well. These schemes, spread across market caps, have done consistently well across market cycles.

Though large-cap fund Franklin India Bluechip has fallen behind its category, it has still beaten the Sensex and the Nifty. For ICICI Prudential, though, almost all schemes have been top-quartile performers over the past five years. These include Focused Bluechip, Dynamic, Top 100, Value Discovery and Target Returns.

In the case of HDFC, its largest schemes, Equity and Top 200, have picked up in recent times. But many others had an indifferent 2012 and 2013. Its Premier multi-cap, large-cap and growth funds have not been spectacular outperformers, thus dragging the fund house’s returns.

For IDFC, its Imperial Equity and Classic Equity funds have underperformed. The largest fund of the group, IDFC Premier Equity, outstripped the CNX 500 and CNX Midcap indices over the years, though it has fallen significantly behind its better-performing peers.

UTI’s schemes, while not chartbusters, have done fairly well after 2007 and especially over the past three-four years. Schemes such as UTI Equity, Opportunities and Midcap have been top quartile performers for a while now.

All of its seven schemes have beaten respective benchmarks consistently over the past five years. Birla Sun Life too has seen all its schemes outperform. While Birla Sun Life’s Equity and Birla Sun Life's Frontline Equity funds did reasonably well, though not topping charts, others such as its Top 100, Long Term Advantage and Pure Value schemes recorded top-quartile returns in their respective categories.

In the case of Kotak Mahindra, its Emerging Equity and Select Focus funds delivered top notch returns, other schemes such as Opportunities, Midcap and Classic Equity delivered above-average performances, beating benchmarks easily.

Most top-performing fund houses have timed the sector shift right — from defensives such as software, consumer non-durables and pharma, that they held in 2011, to cyclicals such as auto, energy and capital goods in late 2013.

Given the relatively gradual nature of the rallies and falls, many fund houses were able to course-correct and catch up. HDFC is a good example, as most of its schemes moved from the bottom to the top of the charts over the past year.

In the top 10 fund houses, there is also a strong set of multi- and mid-cap schemes. As much as two-thirds of the schemes in these AMCs invest in a blend of stocks. Thus, most of them have benefited from the broader market rallies over the past few years.

In the last five years, large-cap schemes from these asset management companies have delivered 15-17 per cent annually, multi-caps gave 16.5-19.5 per cent returns, while mid-caps managed to return 22-25 per cent over this period.

Funds houses, such as SBI and Reliance, have been on a strong revival path, especially over the past three to four years. Many of their schemes had fallen heavily in 2008-09 and had failed to catch up in subsequent rallies. But that has changed.

Reliance’s Vision and Growth schemes, which had underperformed heavily till 2010, have been on the mend. In fact, both schemes have gone on to become steady performers over the past couple of years. Reliance Equity Opportunities and Reliance Small Cap fall in the top quartile in returns. The fund house’s ability to pick performing mid-caps appears to be sound in recent years as was the case till 2008.

SBI too has seen a smart revival in fortunes. Many of its schemes have delivered top-quartile returns over the long term. SBI Magnum’s Multiplier Plus, Equity, Global, Bluechip, and Emerging Businesses have all turned around strongly from early 2010 and have proven themselves over the past four years.

The top 10 fund houses have been chosen for this analysis as they manage the chunk of investor funds and, hence, investor interest is highest in their schemes. But there are other fund houses and schemes that have done well over the long term, which investors may choose.

While there is no case for blindly choosing schemes from the top AMCs, their record, especially over the long term, indicates that most such schemes reward investors with benchmark-beating returns.

They have weathered multiple market cycles and have grown their assets, helped by stable fund manager tenures and smooth transitions; they are, hence, more sought after by investors.

Many foreign fund houses such as Morgan Stanley, ING and Fidelity have sold their AMC business to home-grown players. While a fund house selling out itself may not always be a cause for alarm for investors, the uncertainty associated with the new fund managers and their previous track record can be a cause for concern. Therefore, some amount of caution is necessary in choosing the fund house, apart from the due diligence that needs to go into choosing the right schemes.

Outside the top 10, there are several fund houses that have a set of quality schemes such as Axis, Tata, Canara Robeco, L&T, Mirae Asset, BNP Paribas and Quantum Mutual all of which have several schemes that figure in the top quartile of performance in their respective categories. So, select schemes from these houses too may be chosen.

For example Tata Dividend Yield, Axis Equity, Canara Robeco Emerging Equities, L&T Equity, L&T Value, Mirae Asset India Opportunities, Mirae Asset Emerging Bluechip, BNP Paribas Equity, BNP Paribas Dividend Yield and Quantum Long Term Equity are all quality funds.

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