How mutual funds survived... -- The four-year roller-coaster

Aarati Krishnan

MOST mutual fund investors would like to forget the year 2000.

After doing brilliantly in 1999, most equity funds were caught unawares by the bear market of 2000. Investors enticed into pouring money into equity-oriented funds during the 1999 euphoria could have suffered a substantial erosion in the value of their investments.

But how did the more patient investors -- those invested in equity-oriented funds for four years now -- fare? Which are the funds that best weathered the equity market roller-coaster of the past four years? To find the answers, Business Line analysed the medium-term returns on mutual funds (based on appreciation in net asset values between December 1996 and December 2000, after factoring in dividend and bonus payouts).

Most funds outperform narrow indices

Though the past year was disastrous for equity funds, long-term investing in equity funds is a paying proposition. Fund managers of such funds acquitted themselves reasonably well over the past four years. Fifty-eight of the 86 equity-oriented funds, which have a four-year track record, registered higher holding period returns between December 1996 and December 2000 than the BSE Sensitive Index.

An investor who entrusted his money to an equity-oriented fund is also likely to have earned far better returns than his counterpart who invested in the basket of Sensex stocks. While the Sensex recorded a net absolute gain of 40 per cent in value from December 1996, returns on the 86 equity-oriented funds averaged 96 per cent over the same period.

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Returns accrue in short bursts

Though the majority of equity-oriented funds beat the market returns over a holding period of two, three and four years, very few consistently outperformed the indices year after year. Just eight of the 86 funds with a four-year track record, outperformed the Sensex year on year from 1997 to 2000.

For the others, the bulk of the returns accrued in 1998 and 1999, when the boom in growth stocks and later the technology stocks helped funds beat the cyclical-weighted Sensex by wide margins. To illustrate, the Sensex turned in returns of 12 per cent, minus 15 per cent, 64 per cent, and minus 21 per cent over 1997, 1998, 1999 and 2000 respectively. But the average returns on the 86 equity-oriented funds for the respective years were 4 per cent, 6 per cent, 110 per cent and minus 23 per cent respectively.

Fewer funds survive the year

While 80 per cent of the funds outdid the index in the bear market of 1998, just half this number, 40 per cent, managed to outperform the bear market of 2000. One reason for this could be that, starting from early 1998, growth stocks (in the pharma, FMCG and technology sectors), began to outpace the rest of the investible universe by a substantial margin.

In 1999, while pharma and FMCG stocks began to lose value, technology stocks continued to register impressive value gains. As a result, several funds were able to beat the Sensex (which was then composed mainly of `old economy' stocks), by hopping on to the growth stocks bandwagon both in 1998 and 1999. But in 2000, after the technology stocks meltdown, the investment climate turned more unpredictable, with very few stocks turning in positive returns. With stock selection turning out be the critical variable in determining fund performance, fewer funds were able to outperform the Sensex.

It should also be noted that the Sensex itself was rejigged in two tranches in 1998 and 2000, to include a higher proportion of technology stocks. In 2000, it thus became more difficult for funds to outperform the Sensex by focussing on sectors not fully captured by the Sensex. This is evident from the fact that, while 67 per cent of the equity funds managed to outdo the Sensex over a four-year period, only 45 per cent outperformed the more broadbased S&P CNX 500. The latter's holding period return was 89 per cent over the four-year period, against the 40 per cent of the Sensex.

Consistent performers

Just eight of the 86 funds with a four-year track record actually beat the Sensex in each of the past four years. The top performers are Alliance Capital Tax Relief, Kothari Pioneer Bluechip Fund, Zurich India Equity Fund, JM Tax Cover 1996, Zurich India Capital Builder and Zurich India Top 200 Fund. The few common features of these schemes are that each is a small or mid-sized scheme that follows an investment strategy of putting money into a few large-cap liquid stocks.

Except for Alliance Capital Tax Relief, which always remained aggressively invested in technology stocks, the other funds are well-diversified across sectors. Measured exposures to technology stocks appear to have helped the funds weather the bear market of 2000 well. For investors with a horizon of three years, this may be a good time to take exposures in these funds.

Importantly, each of these funds encashed a part of their returns in the bull market of 1999 to pay out hefty dividends to their unitholders. Alliance Capital Tax Relief paid out a Rs 30 per unit dividend in May 2000, Kothari Pioneer Bluechip distributed dividends totalling Rs 9 per unit over 2000, while Zurich India Equity Fund paid out dividends of Rs 4.70 per unit over the year.

Though the large dividend payouts were partly meant to take advantage of tax breaks, they turned out to be quite fortuitous for unitholders in a falling market. However, the good performance of these funds cannot be entirely attributed to dividend payouts. The growth options of funds such as Kothari Pioneer Bluechip, and Zurich India Equity Fund also turned in an equally good performance over the four-year period.

Few fund houses did consistently well across schemes. While Zurich India Mutual Fund performed creditably in three of its four equity schemes, Kothari Pioneer Mutual Fund faced a setback in two of its four open-end equity funds. Kothari Pioneer Bluechip Fund continued its good performance of the earlier years, though Prima and Prima Plus suffered setbacks in 2000. The small/mid-cap focus in these funds, as opposed to the large-cap feature of Bluechip Fund worked against the fund in 2000.

Small/mid sized funds that were diversified across sectors did well. But were those that restricted exposures to individual stocks also more consistent than the others? At least the smaller funds answering this description have. Sundaram Growth Fund, Sun F&C Value Fund, Templeton India Growth Fund and Zurich India Top 200 Fund restricted the erosion in their NAVs and outperformed the Sensex. They also outperformed the Sensex in the bull market of 1999. Due to their impressive show in 1999, the more concentrated funds retained higher absolute returns at the end of the four-year period.

The laggards

The list of funds that trailed on four-year returns includes some of the older PSU-sponsored funds. GIC Fortune 94, Canbonus, Shriram Tax Guardian and Boinanza Exclusive Growth are among those that actually suffered an erosion in investment value over the four years. Several of the larger UTI schemes also figure in the bottom quartile in terms of holding period returns over four years. Here, too, the divergence between large and mid-sized schemes is apparent.

While mid-sized schemes of the UTI, such as the Equity Opportunities Fund, Primary Equity Fund and Index Equity Fund, outperformed the Sensex returns over the four years, the earlier set of growth schemes from the UTI -- such as Mastershare, Masterplus and Mastergain 1992 -- fell behind the indices, recording holding period returns of between 20 and 30 per cent over the four-year period (against 40 per cent on the Sensex). This could be partly because the schemes, which closely mimicked the Sensex in 1997 and 1998, were restructured in 1999 to include more growth and technology stocks.