Funds wary of equity schemes’ growing size

Gains may moderate in the backdrop of three previous years of high returns, say fund managers

The burgeoning size of several equity schemes amid exceptionally high benchmark-beating returns, especially in the past three years, has made fund managers cautious about the sustainability of such a trajectory of returns in the future.

Over the last three years, India's key stock indices have gained 12-14 per cent on an annualised basis, while the average return made by the country’s 10 largest equity schemes is above 26 per cent.

Fund managers believe that this outperformance is likely to moderate and investors should be ready to see a rationalisation in returns. The cautious warning comes at a time when retail investors have pumped nearly ~2 lakh crore into equity-related and balanced funds since mid2014.

Sankaran Naren, chief investment officer (CIO) of India’s largest asset management company ICICI Prudential Mutual Fund, says, “Over the past three years, alpha generation against benchmarks of many large schemes has been higher on account of the good performance of their mid- and smallcap exposures. Given that this segment has run up, we believe that the alpha generated may moderate in future. As schemes become larger, the concentration of portfolio also has to reduce and the number of stocks has to be higher.”

The fund house has three schemes from its stable that have made to the list of India’s 10 largest equity schemes, ICICI Prudential Value Discovery, ICICI Prudential Focused Bluechip and ICICI Prudential Balanced Advantage. Put together, these schemes had an asset size of ~40,412 crore as on August 31.

Mahesh Patil, co-CIO of Birla Sun Life Mutual Fund who manages India’s fourth largest equity scheme Birla Sun Life Frontline Equity (~13,634 crore), echoes this sentiment. “The last three years have been quite good from the schemes’ outperformance point of view. However, going forward that will normalise. The size of a scheme can be a constraint but it has to be seen in relation to the investment style and strategy of the scheme. Liquidity can sometimes be challenging in large schemes, which tends to have some kind of impact on the performance.

However, I believe that schemes will continue to outperform benchmarks, but with a slight drop in margins. If you see the year 2014, outperformance against benchmarks was huge. That phase is now out,” he says.

But he is confident that in the long term, there are possibilities of higher alpha returns as he believes that the market still offers enough bottom-up stock-picking opportunities.

It is important to note that out of the ~5 lakh crore of equity assets that the fund industry currently manages, nearly ~1.9 lakh crore, or about 40 per cent, is in the top 20 largest schemes.

There are fund managers who think that size should not always be the cause of underperformance and that there is still merit in active fund management.

Sunil Singhania, CIO, Reliance Nippon Mutual Fund, says, “Size may not be blamed as the only factor to impact the schemes’ capability of beating the benchmarks with a healthy margin. There could be circumstances when there is a sudden rise in inflows in certain schemes and it becomes an issue to deploy all the cash into the markets. Schemes which gain size gradually do not generally face this issue much, but those which see sudden and undesirable inflows during a certain time may find it difficult to perform far better than the benchmarks.”

There are nearly 15 equity schemes that have gained a size of $1 billion. And with the kind of flows they are witnessing, a further rise in their assets cannot be ruled out.