Large cap fund managers largely don?t stick to their funds mandate. And if they do, there are high chances that they under perform against benchmark indices, the Sensex or the Nifty. An FE study of 85 large cap funds has found exactly that. Perhaps, this trend is an indication that mutual funds need to choose appropriate benchmarks in sync with their portfolio.
Data provided by Value Research, a mutual fund tracker, shows that 41 out of 73 large cap funds (or 56%) have constructed a portfolio with at least 25% or more of its assets in mid or small cap indices. Most portfolio fund managers had chosen the Nifty over the Sensex as its benchmark (65 Nifty and 40 Sensex). Interestingly, while on an overall basis, 53% of large cap funds were found to under perform their respective benchmark indices over the last three year period, the extent of underperformance was even more among those who stuck to their investment mandate. It was found that 61% of ?genuine? largecap funds underperformed their benchmark indices. This is worrisome since it infers that some fund managers who have outperformed the benchmark have done so by going beyond their investment mandate.
There are many reasons why the Sensex or the Nifty might be chosen as a benchmark. Initially in the 1990s when private fund houses started operations, almost everybody chose the Sensex or the Nifty as its benchmark as during that time ? the equity funds were multicap (investing across market capitalisation of companies). Over the years, however, mutual funds introduced different types of equity schemes, like mid cap, large cap, value, growth, the older schemes got repositioned as one of the above. Yet, many equity funds today are not sticking to their investment mandate. It seems in the chase to earn higher returns and beat their peers, higher risks are being taken by fund managers. To be fair, it is also likely many have chosen Sensex or Nifty since it is a fair representative of market returns ? while many index funds are also benchmarked to these indices.
Any higher returns than these indices should prove the point that ‘active’ portfolio managers are doing their job well. Interestingly, the fund managers aren’t doing anything wrong, going by their statements statements in the offer documents. Why so ? This is because often these offer documents are loosely worded to allow fund managers to tweak portfolio the way he wants. Perhaps in spirit, the fund manager might need to change benchmark to that of broader indices like S&P 500 – and tag itself as a multicap fund.