The country?s first fundamentally weighted Exchange Traded Fund (ETF), MOSt 50, which is about to complete a year has underperformed the broader market. In the last one year, MOSt 50 basket of stocks gave a return of 2.02% against a Nifty return of 5.5%. In June last year, Motilal Oswal Asset Management had launched MOSt 50, based on Nifty?s 50 constituents.
Unlike traditional index funds, where weightage of each stock is determined on the basis of free-float market capitalisation, MOSt 50 assigns weightages to each stock based on stock fundamentals as measured by financial parameters such as return on equity, price to earnings, etc. Fundamental indices over the long term are expected to outperform the market cap-weighted ones as it automatically buys more of under-valued stocks and less of over-valued stocks. While over the one year period, MOST 50 stocks have underperformed Nifty, over three year period, the stocks outperformed Nifty by a huge margin. Over the last three years, MOSt 50 stocks gave a return of 74%, more than double that of Nifty (34%).
According to its fund manager Rajnish Rastogi, the fund underperformance could partly be attributed to its overweight positions in auto, metals and cement stocks that have not done well on a relative basis. Its underweight position in telecom, consumer non-durables and capital equipment has also hurt its performance by 1.15%. As of May 31, MOSt 50 had financial (26.86%), energy (22.51%), automobile (12.44%), diversified (10.98%) and metals (9.94%) as its top-five sector holdings.
In terms of stocks, Tata Power, Grasim Industries, IDFC, HDFC and Reliance Industries were its top holdings. The fund house charges expense ratio of 1% per annum to fund’s NAV and currently has assets worth R213 crore.
Globally, fundamental indexing is well-known among investors, though it is a relatively new concept here. Rafi 1000 was the first index to be launched by Roger Arnott somewhere in 2005 while index funds made its debut in 1976. Globally, some fundamental index funds have beaten the market.
According to Bloomberg data, in the last one year, FTSE Rafi Emerging Market index (fundamental index) gave a return of 23.1% against 22.6% for the MSCI Emerging market index. Even over the three year period, Rafi index has outperformed MSCI emerging market index ? it gave a return of 8.3% against 4.2% return for MSCI index.
However, in terms of assets under management, market cap-weighted indices continue to be more popular with about $1.2 trillion of assets globally.