Mutual fund investors miss making big gains

Small is the new big.

At least, when it comes to equity mutual fund performance over the last one year.
Data from Value Research, as on October 27, show that the top 20 performer schemes gave an average return of 126.42% in the period.

But, interestingly, they held only 2.51% of the assets (or investor money) parked in a total 430 equity mutual fund schemes.

That is, just Rs 4,836 crore out of Rs 192,574 crore, including tax-saving plans and exchange traded funds.

Another way to look at it: The 20 funds that more than doubled returns constitute only 0.77% of the total assets of the mutual fund industry of Rs 627,999 crore (through 1,090 schemes) as on September 30, 2009.

This is startling stats, and tells that mutual fund investors have completely missed out on the best performing schemes.

Someone investing even in the 20th best scheme would have doubled money — made exactly 114.04% gains — but in all, only Rs 143.8 crore were put in by investors in the scheme.

The best returns were given by ICICI Prudential Discovery (Institutional Plan) at 154% followed by the same fund’s Regular Plan which returned 150.56%.

No. 2 Taurus Infrastructure Fund knocked up a 147.35% gain.

ICICI Prudential Discovery has an asset base of just Rs 407.16 crore (regular and institutional plan clubbed) and Taurus Infrastructure Fund Rs 28.59 crore.

The third best scheme, JM Multi Strategy Fund, returned 138.83%. It’s assets? Just Rs 52.29 crore.

Of the 20 best performing open-ended equity schemes, only two had an asset base of more than Rs 500 crore — DSP Black Rock World Gold Fund (Rs 1,685.96 crore) and Birla Sunlife Mid-cap (A) (Rs 780.91 crore).

But the World Gold Fund and the AIG World Gold Fund (corpus Rs 280.61 crore) that also features in the top 20 schemes are not really equity funds.

The Income Tax Act, 1961, defines an equity fund as that which invests an average 65% of its assets in Indian equities over the last twelve months.

These schemes are feeder schemes, which invest in international funds that, in turn, invest in gold and other precious metals and mining stocks.

What goes in favour of these schemes is the fact that they are small.

A small scheme needs fewer stocks to do well for the overall performance of the scheme to improve, unlike a large scheme.

As assets under management increase, fund managers are left with fewer options to invest.
Also, as a mutual fund scheme becomes successful, the fees it earns becomes more lucrative.

This is well put by Jason Zweig, the respected personal finance writer, in his commentary to Benjamin Graham’s all-time investment classic, The Intelligent Investor: “As a fund grows, its fees become more lucrative, making its managers reluctant to rock the boat. The very risk that managers took to generate their initial high returns could now drive the investors away and jeopardise all that fee income. So the biggest funds resemble a herd of identical and overfed sheep, all moving in sluggish lockstep, all saying “Baaaa” at the same time.”

The other question to ask is, why have investors missed out on the rally in these small schemes?

If fundmen are to believed it is primarily because distributors selling these schemes to investors have gone missing.

“Initially, performance was being rewarded with inflows. But that is not happening now because of many reasons,” says an equity fund manager with an international mutual fund house, hinting at the change in the distributor commission payout method that has come into effect since August 1, 2009.

Since August 1, schemes cannot charge an entry load from an investor to pay commission to a distributor. It is now between the investor and the distributor to decide how much commission is to be paid.

More than half the top-20 schemes had assets under Rs 100 crore. Some had as low as Rs 3.87 crore. The average assets held by the top 20 equity schemes was Rs 241.82 crore.

Waqar Naqvi, chief executive officer at Taurus Asset Management Company, says the Taurus Infrastructure fund had around Rs 7.7 crore in April 2009 and now it is Rs 28.59
crore.

“So, we have got fresh flows. But retail participation is still missing. If Sensex hits the 20,000 mark again retail investors would come in,” he said. “In August, September and October 2009, distributors have been in hibernation that has of course been hitting us. But we are drawing plans to take the performance to investors by rolling out advertising campaigns, distributing booklets etc,” Naqvi sad.

The industry that is grappling with missing flows and a new norm for commission payouts, should adapt to the changes in a while say officials.