Equity mutual funds that have outperformed across the market cycles from long times
The track record is widely used as the starting point to evaluate the performance of mutual funds. Generally, historical performance is measured across time periods, ranging from 1- 10 years and funds are ranked based on their performance over a defined period.
Funds can also be evaluated based on their performance during the bull and bear phases of the market. An economy passes through different cycles due to the dynamics of aggregate demand and aggregate supply. Such cycles are primarily responsible for the bull and bear phases experienced by the equity market.
Data for the past eight years shows that the Indian equity market has experienced two bear phases since November 2010—if the market falls 20% or more, it is said to be in a bear phase. The first bear phase was between 5 November 2010 and 20 December 2011: The Sensex lost over 27%, falling from 21,004 to 15,175.
The market had a sustained bull-run from 21 December 2011 to 29 January 2015 and the Sensex jumped nearly 90% from 15,685 to 29,681. The second bear phase was from 30 January 2015 and 11 February 2016 when Sensex lost over 21%, falling from 29,182 to 22,951. Since February 2016, the Indian markets have not witnessed a crash of more than 20%. Sensex went up from 22,986 to 34,474, gaining over 49% from 12 February 2016 to 8 October 2018.
A fund that has performed well in a bull market may perform poorly in a bear market. When markets turn bearish, the fund managers who are able to shift from stocks to liquid instruments or cash tend to lose less than the market. Similarly, when the market turns bullish, fund managers who have the ability to identify undervalued quality stocks gain more than the market.
We have identified equity mutual funds that have outperformed in both the bull and the bear phases since November 2010. During a bull phase, a fund is considered an out performer if its returns are above its benchmark index and, in a bear phase, a fund is considered an out performer, if it falls less than its benchmark index. Such out-performance is due to the skill and judgment of the fund manager who balances the fund portfolio, according to the changing market conditions.
Data source: ACE MF. *Value Research. Out-performance over benchmark (%) is point-to-point fund returns minus benchmark returns. AUM as of August 2018.
We analyzed 431 equity mutual funds across various categories—ELSS, equity diversified funds, value funds, thematic and sector funds. We considered regular, growth plans of schemes across the aforementioned categories and calculated point-to-point returns of the funds and their benchmark indices during the defined bull and bear phases. The funds that have comprehensively outperformed their benchmarks in the last two bear and bull phases were filtered out.
We put an additional filter by looking at the funds that have outperformed their total returns index (TRI) from 1 February 2018 to 8
October 2018. TRI takes into account the impact of dividends and therefore, gives a clearer picture of the actual returns.
Only 18 funds passed through the filters of bull and bear phases and TRI returns. After removing funds with a corpus of less than Rs 500 crore, we were left with just 14 funds. The consistency of these funds’ out-performance shows that they are more suitable for long-term wealth creation compared to peers.