Mutual fund recommendations: 14.6% category average returns in a year; pick highly diversified equity funds The data analysed, using ACE MF database, shows that the funds that have spread their corpus across an ample number of stocks and sectors have performed better in the recent past. ET Wealth tried to study the concentration of equity diversified funds, in terms of their respective average concentration of AUM in the top five stocks and sectors, over the last year
The market or non-diversifiable risks have risen in the past few months due to a jump in the US dollar index, rise in the US 10-year bond yield, volatile crude prices and weakening rupee. The uncertainty around the Israel-Hamas conflict, coupled with higher inflation and elevated interest rates, has also added to the volatility. Equity diversified funds are best placed to manage such volatility as diversification helps reduce market risks. The data analysed, using ACE MF database, shows that the funds that have spread their corpus across an ample number of stocks and sectors have performed better in the recent past, compared to those that are concentrated in a few stocks or sectors.Equity funds with the most diversified portfolios
How markets are placed
The benchmark BSE Sensex lost over 1,637 points in October 2023, which was the highest monthly absolute loss in 2023. Though the markets have made some recovery in November due to falling crude oil prices and softening of US bond yields, they are expected to stay volatile over the next few months.
A Prabhudas Lilladher Diwali Picks report expects the next few months to be volatile due to the El Nino impact on inflation, global volatility in commodities and interest rates. “The strong resilience of the US economy, despite high inflation, is likely to keep policy rates high, which can impact FPI inflow in the near term,” it states.
Equity fund concentration
ET Wealth tried to study the concentration of equity diversified funds, in terms of their respective average concentration of AUM in the top five stocks and sectors, over the last year. The latest data is for September 2023. The funds holding at least 40 stocks Equity funds with a wider spread across stocks and sectors could prove effective amid rising volatility. Pick highly diversified equity funds in their latest monthly portfolios were included, and 146 funds were selected. A wide range was observed in the 12-month average concentration of AUM in the top five stocks and top five sectors. For stocks, the range of concentration was between 10% and 40%. For sectors, the range varied between 37% and 68%. To identify funds with better diversification, the average concentration (in both stocks and sectors) of each fund was compared with the category average. There are 60 funds with respective 12-month average concentration lower than the category averages. Such funds deployed a lower proportion of their corpus in the top five stocks or sectors (compared to average), which implies there is relatively better portfolio diversification.
The group of such funds delivered 18.9% returns in the past year. The group that has a concentration (in top five stocks/sectors) higher than the category averages delivered 11.8% returns. The one-year category average of all equity diversified funds was 14.6%. The outperformance was also visible in the past six months’ returns. The group of funds with lower concentration (relative to category average) delivered 19.2% returns, against the other group’s 12.4%. The category average of all equity diversified funds was 15.3% (analysis based on 3 November 2023 NAVs). The performance of better diversified funds is also reflected in the risk-adjusted returns—Sortino and Treynor ratios. While the Treynor ratio measures the excess return that a fund generates relative to the market risk, the Sortino ratio measures the excess return relative to the downside risk. The group with lower concentration risk delivered average Treynor and Sortino ratios of 1.7% and 1.2%, respectively, against 1.1% and 0.77% by the group of funds with AUM in top five stocks/sectors higher than the category average. Such ratios are calculated for a one-year period using daily NAVs and are not annualised.
The 10 funds listed in the table have been selected by sorting 60 funds in the ascending order of the difference between the 12-month average concentration in the top five stocks and the category average. From the sorted list, those with an AUM of over Rs.1,500 crore were included. Also, funds with ratings of 3 star and above from ValueResearch and Morningstar India were screened.
Attributes of selected funds
The aggregate AUM of these 10 funds stood at Rs.1.1 lakh crore at the end of September 2023 and grew by 48.1% y-o-y. Comparatively, the AUM of the category grew by 32.3% y-o-y. The group’s average portfolio turnover ratio stood at 32.4% against the category average of 65.4%. Eight out of 10 funds have turnover ratios lower than the category average in September. The portfolio turnover ratio reflects the percentage of portfolio holdings that were changed in a year. Looking at the portfolio composition, Persistent Systems, Federal Bank, Emami, Voltas and Indian Hotels are among the stocks that were held by most of the selected funds in September. In terms of sectors, banking & finance, capital goods, automobiles, steel and power were among the favoured sectors of most of the selected funds in terms of the number of shares held in September 2023.
Connect with Experts - Wealth creation made easy
This story originally appeared on: India Times - Author:Faqs of Insurances
