The equity markets have had a volatile ride so far this year, correcting and rallying rapidly in a matter of months. Be that as it may, some equity mutual funds across categories have managed to latch on to the market upswing of the past few months.
So, what factors explain the superior returns delivered by some schemes? Here are some factors that explain their outperformance.
Allocating to defensives
Among large-cap equity schemes, Canara Robeco Bluechip Equity Fund (CRBEF) managed to top the performance chart over the last one year, with 9.27 per cent returns. The large-cap funds category delivered just 0.28 per cent, according to Value Research. The Nifty 50 TRI gained 0.34 per cent over this period.
“Our investment strategy aims at buying quality stocks with growth visibility at attractive prices,” says Nimesh Chandan, head of equity investments, Canara Robeco AMC. The scheme had cut its exposure to banking and financial services to 31 per cent in June 2020, from 39 per cent as of December 2019. This is moreover in line with category average of large cap funds. Allocations to defensive sectors such as software, healthcare and consumer-non durable also increased by 6.25 percentage points over this period.
Focus on ‘quality-growth-valuation’ also worked for DSP Quant Fund (DSPQ). The fund just completed one year in June. Over last one year it gave 13.99 per cent return. It picks stocks from the BSE 200 index. DSPQ holds 85 per cent its portfolio in large-cap stocks. “While our investment process selects attractively valued quality stocks offering good return on equity and future growth, it eliminates stocks with high leverage, inefficient capital allocation and high volatility in a rule-based manner,” says Anil Ghelani, CFA- head of passive investments and products, DSP Investment Managers. DSPQ has investments only in select BFSI names such as HDFC Bank, Bajaj Finance, HDFC, Muthoot Finance and private sector insurance companies.
Avoiding trouble makers
In a slowing economy, fund managers are worried about the risk of business survival. “Irrespective of the size of the company, the risk of survival emanates from negative operating cash flow and high balance sheet debt. Our filters of 70 per cent operating cash flow in the history of a company, clean balance sheets and good return on equity, ensure that the businesses will survive and do well over the cycle,” says Aniruddha Naha, senior fund manager, PGIM India AMC. He manages the second best performing multi-cap offering – PGIM India Diversified Equity Fund (PDEF), which delivered 14.27 per cent returns. He also manages the PGIM India Mid-cap Opportunities Fund, which delivered 20.63 per cent returns, to top the mid-cap fund category in the one-year period. The schemes focused on containing the downside by selecting good quality stocks and hedging the portfolio using derivatives whenever required.
“We avoid companies with leveraged balance sheets,” says Rajeev Thakkar, chief investment officer, PPFAS AMC. He manages the PPFAS Long Term Equity Fund (PLTEF) – the scheme has topped the performance chart of the multi-cap equity funds category with 17.99 per cent returns, as against the category average of 0.45 per cent in the last one year.
As a small group of stocks were trending upwards in 2019, some schemes have chosen to take focused bets on quality stocks to deliver outperformance. However, these schemes have chosen a different path – of being diversified. CRBEF, PEDF and DSPQ do not have concentrated exposures to sectors or stocks.
Naha bought pharma stocks early because valuations were cheap and there was big under-ownership.
Though PLTEF has a compact portfolio of only 24 stocks, it has invested in shares listed overseas, and achieved geographical diversification. Since some of the overseas stocks bounced back faster than Indian markets in recent past, it helped the scheme deliver well.
Acting when required
Being long-term investors, PLTEF has a low portfolio turnover. However, as the market turned volatile the fund manager picked up stocks such as ITC, Multi Commodity Exchange, Oracle Financial Services Software in March and Microsoft in April.
CRBEF bought shares of Mahindra & Mahindra and Hero MotoCorp in April when auto stocks were reeling under pressure. The prices were at mouth-watering levels and as the monthly sales numbers and management commentary showed that the situation was not as bad as investors believed, and the prices bounced back.
PGIM funds used Nifty and Bank nifty futures regularly to hedge the portfolio during market corrections.
Where should you invest?
Though DSPQ has a limited history, other schemes have been around for some time. PLTEF has stuck to the investment style since inception and has evolved over a period of time. Other schemes have seen change of fund managers and have tweaked their investment strategies to deliver better. Strategies adopted by these schemes need not be evergreen. For example, a sudden fall in overseas listed tech stocks held in PLTEF can impact the fortunes of that scheme. A broad-based rally in can dwarf the performance posted by quality conscious schemes such as DSPQ and CRBEF. Investors should keep scheme-specific issues in their mind while investing.
“In March, when stocks were falling, not everything was bad. And now when the stocks are going up, investors must understand that not everything is good,” says Chandan. He advises investors to calibrate their return expectations down in the backdrop of higher valuations. Investors should consider systematic investments with a long-term horizon.