‘We believe as market efficiencies grow, it is challenging for active funds to beat the benchmarks’: Koel Ghosh, S&P Dow Jones Indices

Equity market is a zero sum game; one can earn alpha if another investor earns negative alpha, says Ghosh

Kumar Shankar Roy Sep 5, 2019

Koel Ghosh, head south asia, s&p dowjones indices

Passive investing is picking up pace in India. Exchange traded funds (ETFs) now have about $20 billion of investor money. Koel Ghosh, Head- South Asia, S&P Dow Jones Indices, has been for years evangelising the utility of passive investing. RupeeIQ’s Kumar Shankar Roy caught up with her for a quick chat when she recently visited Kolkata. Read on to know more.

You have been advocating passive investing for a long time. Are active fund managers not doing their job?

The SPIVA India Scorecard compares the performance of actively managed Indian mutual funds with their respective benchmark indices over different investment horizons. In 2018, Indian Equity Large-Cap and Indian Equity-Linked Saving Schemes (ELSS) fund managers struggled to beat their respective benchmark, with more than 90% active funds underperforming their respective benchmarks in both categories. The S&P BSE 100, the benchmark for Indian Equity Large-Cap funds, returned 2.62% over the one-year period, whereas the S&P BSE 400 MidSmallCap Index, the benchmark for Indian Equity Mid-/Small-Cap funds, ended in the red, down 17.16% during the same period.

Many fund managers say that a fund should outperform over a cycle and not each year. Are active fund managers struggling over longer periods of time?

Data shows that even for longer periods of time such as five and 10 years, active fund managers face a challenge. In five-year period ended December 2018, 57.55% of Indian Equity Large-Cap funds were outperformed by the index S&P BSE 100. Over 10-year period, the percentage of such funds outperformed by the index rises to 64.23%

Maybe this underperformance is regards to large-cap funds alone. How are ELSS and Mid/Small-Cap funds placed?

Over the one-year period ending December 2018, the S&P BSE 200 remained flat, at 0.82%. Over the one- and three-year periods ending in December 2018, 95.45% and 88.10% of ELSS funds underperformed the benchmark. Over 5-year period, 40.54% ELSS funds underperformed while in the 10-year period, 51.52% ELSS funds were beaten by the benchmark.

The benchmark for Indian Mid-/Small-Cap Equity Funds, the S&P BSE 400 MidSmallCap Index, was down 17.16% during the one-year period ending December 2018. Though this equity segment ended deeply in red, only 25.58% of the active funds underperformed the benchmark over the one-year period. In the 3-year period, the percentage of Mid-/Small-Cap Equity Funds outperformed by the index rises to 56.52%. In the 5 year period, this number falls to 39.68% but in the 10-year period, this number again rises to 55.26%.

Okay, you made your point. What are the reasons behind active investing faltering against benchmarks? How is passive investing challenging active investing in such a big way?

Both globally and locally, statistics prove that benchmarks are often outperforming active funds. We believe that as market efficiencies grow, it is challenging for active funds to beat the benchmarks. We must remember that there is a higher cost structure in active funds as compared to low expense passive structure.

Consistency in delivering above-average returns are not easy given churn in fund managers and continuously changing market dynamics.

In India, there has been alignment to Total Returns (TRI) and new classification (Sebi categorization of funds). Hence, outperformance to benchmark indices is a further challenge.

It is essential to understand that the equity market is a zero-sum game; one can earn alpha if another investor earns negative alpha.

We have seen quite a few fund houses launching passive products. How is the indexing space evolving?

From plain vanilla indices like market cap and sector based, it is now moving to factor based indices and products like single factor, multi factor etc.

ESG indices are also seeing growing awareness. In India, traditionally investors have given more importance to returns. ESG is more about quality than just returns. Over the years, we will see investors preferring ESG products.

How have the assets for ETFs in India moved over the years?

Assets under management (AUM) for India’s ETFs have seen exponential growth over the last 5 years. At the end of May 2019, the Indian ETF industry had 78 ETFs, assets of $20 billion from 20 providers on two exchanges. In 2014, AUM was $2 billion. In 2010, AUM was about $1 billion.

The key driver of the substantial growth in equity ETF AUM has been government initiatives, one of which is the disinvestment by Government of India via ETFs. The contribution by EPFO is also a key driver of growth in ETF assets.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.

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