A long and terrible year is coming to an end. Of course, there’s still two days left and it may yet deliver us a parting kick. That’s just the sort of thing that one has to come to expect from 2008. For mutual fund investors, this has easily been the worst year ever. This is hardly surprising, given the way stock prices have collapsed across the board.
The mainstream equity category of diversified equity funds halved investors’ money, falling an average of 55% during the year. This 55% loss represents more than Rs 60,000 crore of losses for investors who had invested in diversified equity funds.
This was actually slightly worse than the two large cap indices, the Sensex and the Nifty, which are both down about 53% during the period. This is unusual-the average diversified equity fund generally beat the indices by a wide margin.
The depth of the collapse in 2008 has led to a certain fatalism among fund investors. People have just thrown up their hands, figuratively speaking, and abandoned any attempt at looking more deeply into what went wrong and what went right. Or at least, what went more wrong and what went less wrong. The 55% is merely the average of the funds. There’s rather a large range hidden within this.
The worst fund is down about 80% and the best one, just about 35%. The 80% is not really an extreme case – in all there are eight funds that are down by more 70%. At the other end of the performance continuum, there are about 10 funds that fell 45% or less. This is not a small difference. If you started the year with Rs 20 lakh, the worst fund would have reduced it to Rs 4 lakh and the best one would have reduced it to about Rs 13 lakh.
Of course, the above numbers apply only to the worst-case investors -those who made their entire investment a year ago. Hopefully, there are many mutual fund investors out there who have imbibed the correct mantra and have been around for a longer term. Such investors will appreciate the fruits of choosing good funds better. Over the past three years, the best funds would have grown your 20 lakh to between Rs 25 lakh and Rs 28 lakh, while the worst ones would have shrunk that amount to around Rs 10-12 lakh.
The best part of the story is that the differentiation between the better and the worse is as predicted. Funds that were more aggressive, that dabbled more in smaller companies and took more concentrated bets are the worst performers.
In fact, the three worst funds of 2008 were in the top five in 2007. This slide from the very top to the very bottom is not unexpected. It holds an old, well-worn but fundamental lesson-mutual funds that do the very best in bull runs fall suddenly and sharply when the good times turn to bad. It’s an inevitable side-effect of how equity fund managers generate excessive returns during bubbles.
In many ways, the real surprise of 2008 was how debt funds fared. Debt funds are supposed to be stable and conservative, so these surprises came as a shock to their investors.
While I’ve discussed debt funds in detail in the past few weeks, it must be pointed out that the crises faced by these funds during 2008 fall into two categories. Interest-rate changes, while unexpected, are very much part of the game and will remain so. But the liquidity freeze in October and November was a structural problem that is unlikely to happen again.
In all, 2008 may have been a terrible year, but given what happened in the underlying markets, it did follow a pattern. Moreover, it was a year that clearly points the way forward for fund managers and investors.
The author is CEO, Value Research