MFs fail to do one up on Sensex show this year

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MFs fail to do one up on Sensex show this year

Bears might be rampaging the bulls in recent times, but, historically bulls have often got along with fund managers. That is, when bulls charged on the Dalal Street, fund managers often outperformed the market returns. In other words, they managed to give returns that were more than the market (Sensex).

The year 2006 has been a peculiar one though. Only 9% of equity diversified schemes managed to outperform Sensex in 2006 (year till date). This is despite Sensex seeing a run of 35% plus during the calendar year.

This is the lowest extent of out-performance in a bull market ever since private sector mutual funds set shop in India in ’92-93. Bull market is defined as year of positive returns in a single calendar year by Sensex.

At a time when mutual funds are collecting large sums from the public, this performance seems badly timed. Fund managers may have to get back from marketing their schemes to fulfilling the elementary requirement of giving market-beating returns.

This is evident from the fall in the out-performance numbers in the past two years. After three years of solid out-performance – 2002, 2003 and 2004 – when almost 90% of equity fund managers gave market-beating returns, in 2005, out-performance numbers fell to 40% in 2005 and 9% in 2006.

This year’s out-performance is also the second lowest number since 1996, as per a 14-year ETIG study. Historically, fund managers have managed to outperform the market in bullish phases. But, this time around, the unexpected market behaviour – where a few large-caps have outperformed, while most mid-caps have languished – seems to have caught many on the wrong foot.

Looking back at the good times, in 2004, fund managers managed to give market-beating returns by investing in mid-cap stocks that saw a good rally. But, 2005 and 2006 was different since mid-cap stock indices gave lesser returns than that of large cap index.

In the last one year, ET Midcap Index managed returns of 38.5% compared to 54.9% for Sensex. With the mid-cap stocks underperforming large caps, equity funds NAVs managed comparatively lesser returns. If last 14 year returns are any indication, equity funds generally tend to outperform the market in a bull market, but under-perform in a bearish market.