Moneycontrol Mutual Fund Summit | Investor behaviour will be key to alpha generation: Fund managers

In the age of ETFs and index funds, actively managed mutual funds have to find new ways to generate alpha. About 80 percent of all actively managed U.S. stock mutual funds underperformed their benchmark in 2021, according to S&P Dow Jones Indices' annual SPIVA report.

This set the stage for the panel discussion on Maximising Alpha – Can active funds truly deliver superior returns? at Moneycontrol's Mutual Fund Summit on December 14.

Information asymmetry is now bridged with several research analyses and reports, so the key to alpha generation will be investor behaviour. This was the consensus.

S Naren, CIO, of ICICI Prudential MF said, "We decided to focus on hybrid funds for alpha generation. That gave us liquidity. In March 2020, we could buy Rs 10,000 crore of stocks."

Citing an example, he said that investors used to ask for a cap on PSU weightage in mutual funds, a few years back. "But now look at PSU stocks - some running up 10 percent in a day."

So, being a contrarian can help generate alpha, said Naren. "Scale is a benefit if you are contrarian," he added.

Also Read: Moneycontrol Mutual Fund Summit | ETFs, index funds have shortcomings like gaps in pricing and NAV: Usha Thorat

But, R Srinivasan of SBI Mutual Fund had a different point of view. "Being a contrarian helps create alpha in the short term. But beyond that, you don't need to be a contrarian," he said.

But, why has the alpha generation become tougher? Anoop Bhaskar of IDFC MF explained. "In the last few years, markets have become very flat. It is not easy to find an HDFC Bank as we did in 2008," he said.

In the last few years, alpha generation has come in IPOs, he chipped in.

Neelesh Surana of Mirae Asset MF believes alpha generation is not a mutual fund's primary job.

"Our main job is to beat the benchmark. The second is to give better returns than peers. The third is absolute returns. Alpha generation is a zero-sum game," he said.

Meanwhile, S Naren believes mutual funds have no real competition as of now. "Entire PMS and AIF industry has grown only during bull markets, and we will have to see whether it lasts one good correction. If it does, then mutual funds have a good competition."

Pockets of opportunity

The entire panel said they were Overweight on financials at the moment, on the back of good earnings visibility and strong asset quality. They even joked S Naren should not have financials in his fund since he was a contrarian.

Meanwhile, Surana said, "Earnings recovery have been priced in and markets are not cheap."

He sees opportunities in Make In India theme, banking, and pharma. Srinivasan, on the other hand, said healthcare and autos have not given good returns in the last year, so there's a case to bet on them.