8 of 10 diversified equity funds have outdone Sensex

Eight out of ten equity diversified funds have managed to outperform the benchmark Sensex during the last one year as active fund managers choose to bet on quality midcap stocks even as large caps bore the brunt of a worsening macro environment.

As per data from NAV India, 186 out of 231 equity diversified funds (with a performance track record of over one year) have managed to beat Sensex returns because they fell less than the 15.7% the barometer slipped by.

While a majority of them have given negative absolute returns, there have been 10 schemes giving positive returns.

SBI Magnum’s Emerging Business Fund has been the top performer with one year returns of 11.59%.

Experts attribute this outperformance to fund mangers’ positioning towards high-quality midcap stocks and low-beta (volatility) sectors.

“2011 has been remarkably different from earlier years in the sense that fall this time has been triggered by large cap names. Though mid-caps and small caps have fallen more than large caps, but they have not been decimated to the extent which we saw in 2008 fall,” said Dhirendra Kumar, CEO of Value Research.

Among the top performing funds, one theme is common that is their preference for midcap consumer themes and low leverage stocks. UTI MNC Fund, SBI Magnum Gold Fund and IDFC Premier Equity fund - all of them had exposure to consumer-oriented quality names.

“Naseeb achaa tha. On a serious note, our philosophy has been to pick good business franchises that have highest market share in their respective sectors and those who enjoy high return on equity and high growth. We have remained overweight on defensives and quality names.” said the fund manager of one of the top performing schemes, not willing to be named.

Swati Kulkarni, senior vice-president & fund manager, UTI Mutual Fund too echoes similar views.

“Last year we stuck to less leveraged stocks with no huge debt on their balance sheets as there were clear signs of interest rate hardening amidst high inflation. Also we choose to remain underweight banking and overweight on selective FMCG and pharma stocks. This along with our exposure to IT and cement stocks helped us,” she said.

Going forward, experts don’t see equity funds to give major absolute returns in 2012 given the macro headwinds.
“I am not too upbeat on equity markets in 2012 as India’s fundamentals are deteriorating and the global macros too are not supportive. Unlike in 2009, we are not going to see sharp rebound this time as things are much worse now,” said Kumar.

“We remain cautious given global and domestic issues and would avoid investment-related themes till clear signs of reversal emerge. However, we have started looking at rate sensitives such as banks and auto,” said Kulkarni.   

Experts advise retail investors to continue putting small amount of investible money into equities systematically in the coming year as equity markets over the long term have always given better returns.

“One should not panic and stop equity investments now. One should have very little expectations and should invest in a systematic fashion over next one and half years. Also allocating part of money into fixed income products like fixed maturity plans or bank deposits makes sense,” said Kumar.

“Retail investors should utilise bad days to put in part of their savings into equities on lumpsum basis even as they continue with their SIP investments,” said Kulkarni.