On average, funds held about 20 percent of their portfolio in mid-and-small-cap stocks over 2018. This share may not seem high. But, with the extent of midcap and small-caps correction, even a smaller allocation can hurt.
On a one-year basis, hybrid aggressive funds are down 3.3 percent on an average. That is not new -- Hybrid aggressive funds can well deliver losses on a one-year time frame.
What is surprising this time around is that this average is lower than the Nifty-100 TRI as well as the average for large-cap equity funds. This fund category is meant to contain equity losses.
So, what gives?
It has to do with an unusual combination of a sell-off in the mid-cap and small-cap space while large-caps remained steadier and the volatility in bond yields. Here’s more.
Hybrid funds: Pulled down by broader market
Hybrid aggressive funds put anywhere from 65-75 percent of their portfolio in equity and the remaining in debt. In both allocations, funds juggle around to maximise returns.
On the equity side, these funds picked up small-cap and mid-cap stocks over the years. This allocation helped these funds post strong returns that matched up with or even beat large-cap funds during the earlier market rally.
However, this mid and small-cap share pulled down returns over 2018. And, while this segment was correcting, the large-cap stocks were far steadier.
The Nifty Midcap-100 and the Nifty Smallcap indices corrected 15.7 percent and 28.3 percent on a one-year basis. The Nifty-100, on the other hand, is up 1.6 percent.
On average, funds held about 20 percent of their portfolio in mid and small-cap stocks over 2018. This share may not seem high, but with the extent of mid-cap and small-caps' correction, even a smaller allocation can hurt.
For example, take a simple blend of the Nifty-100, Nifty Mid-cap 100, Nifty Small-cap 100 and the Crisil Composite Bond index in the average proportion of hybrid aggressive funds. Even this combination resulted in 1-year losses and a steady lag of the Nifty 100 TRI.
Individual funds ranged much more across the market-cap curve. Some funds had a 55-61 percent large-cap allocation. This includes funds such as Mirae Asset India Equity, ICICI Prudential Equity & Debt, Canara Robeco Equity Hybrid, and Franklin India Equity.
Others such as Aditya Birla Sun Life Equity Hybrid ’95, DSP Equity & Bond, Kotak Equity Hybrid, and UTI Hybrid Equity had a higher share of mid-and-small-caps.
Second, stock choices came into play. While large-cap stocks fared relatively better, the large-cap index itself has been held up by rallies in only a handful of stocks.
Outside of these, most stocks saw price falls. The indices, therefore, become a skewed benchmark as far as measuring performance goes. So though funds stayed cautious on the market cap front, they still took a hit compared to the Nifty 50 or the Nifty 100 returns.
For example, Reliance Equity Hybrid underperformed despite a high large-cap allocation as stocks it held saw price corrections.
Third, some funds also got more aggressive on the equity front as the correction threw up buying opportunities. Adding to equities at a time when stocks were falling exacerbated the impact.
Debt volatility hurts
If stock corrections were a sore point, a volatility in bond yields added to the trouble. For the most of 2018, expectations were that the rate cycle would trend upwards. Bond yields also spiked with the liquidity crisis.
Though expectations revered towards the end of the year, bond yield volatility hurt debt returns for funds too. Yield movements affect AAA and government bonds more than others.
And this is where hybrid aggressive funds typically hold most of their debt. They held 5-8 percent of their portfolio in government bonds and 10-15 percent in corporate debt on an average for most of 2018.
They didn’t hold much of commercial paper or bank CDs. Therefore, hybrid aggressive funds were hit on the debt side as well.
This combination of equity falls and debt volatility is not common. It’s not that only funds have faltered. For most of 2018, the Crisil Hybrid 35+65 Aggressive index (which blends the BSE 200 and the Crisil Composite Bond index) itself lagged behind the Nifty 100 TRI.
Hybrid aggressive funds need a 3-year minimum holding period, and have often delivered losses on a one-year basis during market corrections.
On the debt side, while yield movements do affect prices, the fund would still earn the coupon on those bonds and eventually reverse the price movement.
(The author is Deputy Head – Mutual Fund Research, FundsIndia.com)Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.