Blast from the past: Can these mega funds regain their mojo?

Here, we look at three such funds; their recent and historical performance and what investors can expect from them.

ABSL Frontline Fund

It is a large-cap fund with assets under management (AUM) of close to ₹26,000 crore as of 24 January, as well as one of the oldest MFs; it has delivered annualized returns of 19% since its launch on 30 August 2002. The fund is managed by the chief investment officer of Aditya Birla Sun Life Mutual fund— Mahesh Patil —one of the longest-serving fund managers. Patil has been managing the fund for 18.5 years now.

Over longer periods, the fund’s performance stacks up well compared to its peer group. For instance, the fund’s 15-year-return in annualized terms stands at 17% as on 22 January, which is in the top quintile of returns—the fund is ranked fifth compared to other large-cap funds over the same period. A quintile is used to divide fund performances into groups of five, wherein the top quintile accounts for the top-five performers and the bottom quintile for the bottom-five.

Over the last 10 years, the fund has delivered 15% annualized returns— in it is in the second quintile and ranked ninth. Over the last seven years, it delivered 13.7% annualized returns, in fourth quintile (ranked 17th). The fund has lagged benchmark index— Nifty 100 Total Return Index (TRI)— which has clocked 15.6% annualized returns over the same period.

In the last five years, the fund has 15% annualized returns—the third quintile and ranked 15th. The Nifty 100 TRI has 15.8% annualized returns in same period.

“The focus of ABSL Frontline has always been to provide an enriching experience to investors by being consistent, which is evident in the long-term returns provided by the fund. Since its inception in 2002, the fund has provided annualized returns of 19% on lumpsum investments and 16% SIP (systematic investment plans) returns. It has beaten the benchmark in both cases. The underperformance of the fund during 2018 and 2019 can be attributed to a combination of factors,” Patil points out.

Patil says the mid-cap exposure of the fund around this time was slightly higher than other large-cap funds. “Large-cap funds’ exposure to mid-caps varied a lot, from 2-3% to 15% and our exposure used to be in the 15-18% range. Both mid-cap and small-cap segment underperformed in 2018 and 2019. Besides this, the market breadth was also very narrow and only few index heavyweights contributed to the bulk of benchmark returns in this period. We were underweight on couple of such names,” Patil says.

The fund was also overweight on financial services, especially on non-bank financial companies (NBFCs), which underperformed amid rising interest rates and the IL&FS crisis in 2018.

In last three years, the fund has started to show recovery with 16.3% annualized returns in 2nd quintile and is ranked 7th.

Patil says in the current market environment—wherein the interest rates seem to have peaked and economic growth is showing signs of improvement— growth stocks that are trading at reasonable valuations should do well.

The fund looks for stocks that can deliver growth but at reasonable valuations. “In 2018-2019 and to some extent in 2021, investors were willing to pay any price for growth. That is why many growth stocks became even more expensive in price-to-earnings (P/E) terms. That also didn’t favour us as we remained value-conscious and avoided too expensive stocks or exited names where we thought valuations had turned quite expensive,” Patil says.

In recent years, large-cap funds have generally found it difficult to outperform the benchmark index, which has sparked the growth of passive funds. Patil says ABSL Frontline’s focus has now been to beat benchmark rather than just the peers.

“Our first objective is to beat the benchmark. So, we have started to manage the fund tightly vis-a-vis the benchmark, which means the deviations are kept in a particular range. So, the active risk in our portfolio; bets where we are overweight or underweight compared to the benchmark needs to be in the range of 40-50 percentage points. Our mid-cap exposure is capped at 15%,” Patil explains.

The fund remains style agnostic, as Patil says the portfolio has a good mix of growth stocks, quality stocks, value stocks, cyclical stocks and even beaten down stocks that are tactical bets.

DSP Small Cap

The DSP Small Cap Fund (erstwhile DSP Micro Cap Fund) is one of the oldest small cap funds—it was launched on 14 June 2007. Today, the fund, which has more than ₹13,000 crore of AUM, is co-managed by Vinit Sambre, Resham Jain and Abhishek Ghosh. Sambre, who is head-equities at DSP MF, has been managing the fund since 2010.

Since inception, the fund has delivered nearly 18.3% annualized returns. Over the last 15 years, the fund has been the best-performing small-cap fund with 25% annualized returns, beating the benchmark index (S&P BSE 250 Small Cap TRI) returns of 18.3% by a wide margin.

Over the last 10 years, the fund has been the third-best performing small-cap fund. with 24.7% annualized returns, outperforming the benchmark returns of 19.2%. However, in five- and seven-year periods, the fund’s performance has slipped a bit compared to its peers and the benchmark.

Over seven years.,the fund is in 3rd quintile (the fund is ranked 11th compared to other small-cap funds) with 17.6% annualized returns. Over five years, the returns are 25% annualized, in 2nd quintile (putting the fund back in the top 10).

Unlike other small-cap funds that take exposure to large-cap stocks or take cash calls to curb volatility, DSP Small Cap remains a pure micro-cap and small-cap fund. Large-caps are likely to weather an economic downturn better than small- and micro-caps, which are more susceptible to changes in economic cycle.

For example, after the Covid-19 outbreak in 2020, these stocks saw more drawdown than others amid the market correction.

The fund looks for quality businesses. Jain says the portfolio’s weighted average earnings growth over last two years has been 18%, while the fund’s average P/E is 20 times.

But when markets go through a bearish phase, small- and micro-caps tend to face the brunt. As this space is under-researched and accounts for a wider stock universe, there are more chances of finding multi-baggers compared to mid- and large-caps. At the same time, the risk of a stock call going wrong is higher, so risk management remains critical.

The DSP Small Cap Fund has the lowest portfolio churn amongsmall-cap funds. The fund’s portfolio turnover ratio is 21% due to the fund’s buy-and-hold approach, while the category average is at 46.3%. A portfolio turnover ratio of 100% means the fund manager has completely changed the portfolio in the past one year.

The DSP Small Cap Fund can move sharply both on the upside and downside in shorter phases of the market, but the volatility can even out over periods. Hence, it is meant for investors with higher risk-appetite and those with a longer-term investment horizon.

Franklin India Prima

Franklin India Prima Fund is the oldest mid-cap fund, with a track record of over three decades. The fund, which has AUM of close to ₹10,000 crore, is co-managed by R Janakiraman and Akhil Kalluri. Janakiraman, who was recently elevated to the position of chief investment officer, emerging market equities -India, has been managing the fund since 2008.

Since inception, the fund has delivered nearly 19.4% annualized returns. Over 15 years, the fund’s performance is 21% annualized, which is in 2nd quintile of returns (the fund is ranked 7th compared to other mid cap funds over the same period).

However, in five-, seven- and ten-year periods, the fund’s performance has dipped compared to its peers as well as the benchmark index Nifty Mid Cap 150 TRI.

Franklin India Prima Fund has delivered annualized returns of 19.6% over last 10 years, which puts it in 4th quintile of returns (ranked 16th). Over seven years, the returns are 15% annualized, again in 4th quintile (the fund is ranked 18th). Over five years, the returns for the fund are 18% annualized, continuing in the 4th quintile of returns with 18th rank. Across these periods, the fund has underperformed the benchmark index.

Mutual fund experts say that the fund is managed with a strong investment framework, so that stocks short on the fund house’s quality and valuation checks stay out of the portfolio.

The fund looks for quality businesses available at reasonable valuations. When the broader markets (mid- and small-caps), are driven by liquidity and market euphoria more than fundamentals, the fund can miss out on momentum plays due to its more cautious approach.

For example, the fund avoided the mid-cap IT stocks in 2021 even as these stocks started to rally. The reason: valuations didn’t seem sustainable. Similarly, the fund exited its exposure to industrials stocks after a sharp rally in 2021 had pushed up valuations in this space.

In 2023, the fund avoided the PSU financials and generic pharma rally, as these businesses didn’t meet the fund’s parameters of buying quality and steady-compounding businesses. However, PSU financials and generic pharma’s meaningful weightage in the mid-cap benchmark index (PSU financials of 5-6% and generic pharma of 2-3%) contributed to the fund’s underperformance versus the benchmark index.

The fund ended 2023 at 16th rank, but just three percentage points shy of 10th rank or 2nd quintile.

An analysis of the fund’s performance between 1994-2023 shows that the fund is more likely to do better in flat or slightly weaker market environment. In 18 calendar years, when the mid-cap benchmark index delivered less than 25% returns, the fund outperformed benchmark in 12 calendar years and underperformed in six calendar years. In the 12 calendar years, when the benchmark index has delivered more than 25% returns, the fund has outperformed in six calendar years and underperformed in six.

Market regulator Securities and Exchange Board of India requires mid-cap funds to maintain a minimum of 65% of investments in mid-cap stocks. The fund manager has flexibility in how the remaining investments are managed across mid-, small- and large-caps. In Franklin India Prima Fund’s case, this part of the fund tends to have larger allocation to large-caps than small-caps.

Due to higher allocation to large-caps compared to peers, the fund can fall behind when there are periods of sharp rallies in the mid- and small-cap segments.

Lessons for investors

A mutual fund scheme goes through several cycles in its lifetime, which can impact its performance. Investment advisors say it is important to do a thorough analysis before investing in a fund, but also monitor the fund’s performance.

“The underperformance of a fund could be due to various reasons. A fund can be put in the watchlist after a fund manager is changed. Dilution of investment style or markets not being conducive to the fund’s investment style can also contribute to the fund’s underperformance. In case of underperformance, investors should wait for three-four quarters and if the underperformance continues, then take a call,” says Vishal Dhawan, founder of Plan Ahead Wealth Advisors.

Deepak Chhabria, chief executive officer and director of Axiom Financial Services, points out that slowdown in fresh inflows in the scheme can also hinder a fund manager’s ability to execute new investment ideas, which can hurt its performance.

Even if the fund follows a robust investment framework, market cycles may not always favour the fund’s style. “Between 2022-2023, focus on growth and quality stocks actually hurt a lot of funds, as value stocks did well,” says Ravi Kumar TV, co-founder of Gaining Ground Investment Services.

Size can also be a challenge, especially in the mid- and small-cap space as market liquidity can dry up quickly during bear markets, making it difficult for fund managers to exit large stock positions.

“In every new bull market (after a correction), there are new investment themes that emerge. The fund manager operating in the mid- and small-cap segment must be able to exit his outperformed theme quickly and enter new themes. This is harder to do in the mid- and small-cap segment as liquidating positions and taking timely positions can be a challenge,” says Vidya Bala, co-founder of Primeinvestor.in.

Hence, it is important that investors not only diversify across asset classes, but also across schemes and fund houses. Funds within the same market cap segment, but with different investment styles, can help when the market cycle is favouring one style over the other.