Should fund investors worry?

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: Recently, we, a team of analysts at Value Research, did a study to measure exactly how badly the recent downfall in stock prices has hurt stock prices. The results threw up some numbers that may come as a surprise to those focussed on the recent crash. The big news is hardly news — equity funds have had a horrendous time in the recent times. In fact, it is a surprise how bad the recent quarter (January to March) has been for equity funds. This three month period has generally been the worst that equity funds have had since this decade began in January 2001. That’s impressive, though not in a good way. Funds that we classify in the key ‘Diversified Equity’ category, which has the largest number of funds (194) as well as the highest investor interest, lost an average of 28.3% in just these three months. This was far worse than the previous worst of the decade, when these funds lost 16.9% in the first three months of 2001.

A comparison with the benchmark indices show up funds in an even worse light. Of the 277 equity funds (which includes diversified equity as well as other categories) that were part of this study, only 35 outperformed their benchmarks, while 242 failed to do so. What’s worse, of the 35, which beat the benchmark, a mere seven managed to do so by a margin greater than 5%. At the other end of the scale, as many as 142 funds under-performed their benchmarks by more than 5%. Of the small number of funds that beat the benchmarks handsomely, a majority are those that also invest abroad. This demonstrates the value of true diversification in bad times.

However, even international funds lost investors’ money, they just lost less than domestically-focussed funds. In the entire list, the sole profit-making exception was DSP Merrill Lynch World Gold Fund, which invests not in gold but in stocks of companies that are part of the global gold mining and refining industry. In any case, the fact of this fund making a profit is of not much practical use, since such an exotic fund can only be a small percentage of any real world portfolio. The same is true of international funds as well, and not too much should be read in their relative good performance. While equity funds are in some trouble, the normally staid world of debt funds is also not in great shape. Even though debt fund numbers for the entire quarter look almost normal, the month of March has come as a shock to investors who thought debt was a safe harbour in which to ride out the equity storm. Worsening inflation numbers and the resulting uncertainty on interest rates has seen the average returns of funds in the medium and long-term government securities (gilts) category lose 1.1% during March. Even short-term gilt funds, which are supposed to be insulated from interest rate shocks have had a poor month in which they have gained just 0.1% with 6 of the 18 funds in the category making losses.

However, all is not doom and gloom. In my opinion, the good news is that when one looks at a longer period of a year instead of a quarter, fund performance is still very strong and the losses of this quarter have not come even close to wiping out the previous three quarters’ gains. Which means that the moral of the story is quite clear. Investors who have invested steadily over a longer period are still fine. Which is just as it should be.