There are a handful of largecap funds that are more consistent than others when it comes to beating the Sensex in a calendar year; it is just not a matter of statistical coincidence or luck
Advocates of passive investment products like exchange-traded funds and index funds often say that actively managed funds are finding it difficult to beat indices. This argument is most frequently used to play down the efficacy of largecap funds, in the backdrop of years like 2018 and 2019 when many largecap mutual funds actually found it difficult to beat the 30-share Sensex.
One swallow does not a summer make. Similarly, a couple of difficult years does not mean that largecap funds have lost their alpha generation capability. A better way to assess this would be to check whether largecap funds have done against a particular largecap index each year for a longer time period. To help you understand, RupeeIQ has analysed how largecap mutual funds have fared against the Sensex for each calendar year between 2010 to 2019, a space of 10 years. Which largecap funds have beaten the Sensex every year? Read on to know.
As per Securities and Exchange Board of India (SEBI) rules, largecap funds are mandated to invest in largecap companies that are defined as the top 100 by market capitalisation. A largecap fund has to invest a minimum of 80% in top 100 companies, which leaves it with a narrow window of 20% of the portfolio to be invested across other largecap, midcap and smallcap stocks.
We have taken a look at how 22 largecap equity funds performed vis-a-vis against the Sensex. These funds have a 10 year history. We excluded some focused equity funds that have big exposure to largecap funds. As you know, the Sensex has seen a roller-coaster ride if you look at individual calendar year performance. In years like 2012, 2014, and 2017, the Sensex delivered in excess of 20%. In years like 2011 and 2015, the Sensex gave a negative return. In 2016 and 2018, the Sensex delivered low single-digit returns.
Without much adieu, we now tell you which largecap funds have beaten the Sensex every year. Do note that we are not looking at winning streak. We are looking for the number of years when a largecap fund may have beaten the Sensex in a time period of 10 years. Many of the funds may have different benchmarks such as Nifty, BSE 100 etc.
Breaking news: No largecap fund has beaten the Sensex each year in last 10 years.
Yes, that’s true. There is no largecap fund which has been able to outperform the Sensex each year between 2010 and 2019. Since 2018 and 2019 saw a narrow rally in largecap stocks, most funds have struggled if you look for their index-beating performance in these two years.
We came across two largecap funds that have beaten the Sensex 8 times i.e. 8 out of 8 years between 2010 and 2017. That is an incredible feat in itself. Of course, these two funds struggled in 2018 and 2019 but that cannot take away the fact that they had a cleansweep in the 2010 to 2017 period.
These two funds are Aditya Birla Sun Life Frontline Equity Fund and ICICI Prudential Bluechip Fund. In these eight years, Aditya Birla Sun Life Frontline Equity Fund generated alpha (i.e. excess return over Sensex) of between 0.27% to 14.83%. ICICI Prudential Bluechip Fund, the biggest actively managed largecap funds in the country now, delivered alpha of between 0.93% to 11.21% in the same 8 years.
We came across as many as six largecap funds that have beaten the Sensex seven times in the 2010 to 2019 period. These funds are BNP Paribas Large Cap Fund, Invesco India Largecap Fund, Mirae Asset Large Cap Fund, Tata Large Cap Fund, HSBC Large Cap Equity Fund and Principal Nifty 100 Equal Weight Fund.
Special mention must be made of two funds BNP Paribas Large Cap Fund and HSBC Large Cap Equity Fund who managed to beat the Sensex in 2019, a year when just 5 funds in largecap category were able to outsmart the index. The year 2013, when the Sensex gave an 8.98% return, turned out to be a waterloo for most of the six funds. The year 2018, when the Sensex gained 5.91%, was a requiem for all the largecap funds in the industry because none of the portfolios were able to come even close.
We came across as high as 9 largecap funds that have beaten the Sensex six times in the 2010 to 2019 period. These funds are Edelweiss Large Cap Fund, LIC MF Large Cap Fund, HDFC Top 100 Fund, Nippon India Large Cap Fund, UTI Mastershare Fund, DSP Top 100 Equity Fund, Franklin India Bluechip Fund, SBI Bluechip Fund, and IDFC Large Cap Fund. For these funds, years like 2010, 2013, 2018, and 2019 overall appeared as tough times to beat the Sensex.
We came across just three largecap funds that have beaten the Sensex five times in the 2010 to 2019 period. These funds are L&T India Large Cap Fund, Kotak Bluechip Fund, and PGIM India Large Cap Fund.
Also, we came across two funds viz. JM Large Cap Fund and Taurus Largecap Equity Fund that have beaten the Sensex 3 times in the 2010 to 2019 period.
Below is a table on the most consistent Sensex-beating funds in calendar year format.
The above is a statistical exercise only. Truthfully, it is almost impossible for a mutual fund to target a particular return for a year and then aim to beat it. There are too many moving parts. Plus, many funds appear to have missed beating the Sensex return in a particularly good year by small margin.
Then, what are the takeaways? One, largecap funds that have consistently beaten the Sensex over a 10 year period are likely to have better insight and stock picking ability. The funds that have done better than the Sensex in 8 years out of 10 are clearly legends. The second takeaway is that largecap funds that have been most inconsistent in beating a passive index like the Sensex, are obviously poor at marksmanship. They may have escaped sharper investor scrutiny for various reasons, but a sustained failure to beat even something as basic as the Sensex tells us a lot, doesn’t it?
Many fund managers, readers of RupeeIQ and MF industry people will tell you that comparing a fund with the Sensex for a calendar year time period i.e. 12 months, is not right. We agree with them, partially. But if a largecap fund has beaten the Sensex for many calendar years, it is only fitting that we at least acknowledge their process and guile, instead of downplaying the feat to pure luck.
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