The Mutual Fund Show: Flexi-Cap, Mid-Cap And ELSS Funds On Top Of Crisil Raking
Here are some of the key funds in flexicap, midcap, ELSS and aggressive hybrid categories and how they fared on Crisil's rankings.
Crisil Ltd. has released rankings of mutual funds amid a spike in volatility on account of the ongoing geopolitical crisis, inflation pressures and foreign selloff.
Piyush Gupta, director (fund research) at Crisil, outlined the top performers and their rationale on BQ Prime’s special series The Mutual Fund Show. Here are some of the key funds in the flexi-cap, mid-cap, ELSS and aggressive hybrid categories and how they fared.
Flexi-cap Funds
Crisil ranked the IDBI Flexi Cap Fund as the number one.
The fund, Gupta said, has been delivering returns closer to top quartile or top 30 percentile in the last three-four years.
When Crisil ranks the funds, it looks at the performance and portfolio-based parameters to see how diversified it is and whether there is adequate liquidity in the underlying portfolio, he said.
IDBI Flexi Cap has a fairly diversified portfolio even at the industry level. While it’s a small fund, its diversification is closer to the category average, which is unlike other smaller funds, Gupta said. Thus, a combination of strong performance and adequate diversification has helped the fund get the highest rank.
Mid-cap Funds
Quant Mid Cap Fund topped Crisil’s latest rankings.
According to Gupta, Crisil looked at the portfolio over a period of time and found it was fairly concentrated. It has about 25 stocks compared to the category where there are 50-60 stocks. The fund, he said, has been able to deliver strong returns with this concentrated portfolio.
ELSS Funds
IDFC Tax Advantage Fund has been ranked one in the last four quarters, implying its performance has been fairly consistent, Gupta said.
The fund has delivered returns higher than the category as well as the benchmark across all timeframes. The portfolio has had relatively higher exposure to small caps over the three-year period, which has sort of helped in its performance. It’s also fairly diversified both at the company as well as the sector level. The liquidity in the portfolio is slightly weaker compared to the category, but that doesn’t worry Crisil.
Aggressive Hybrid Category
ICICI Prudential Equity & Debt Fund, which has moved from three to one, has very large assets under management within a category, Gupta said.
“If you were to go back, maybe the quarter before the previous quarter, it was ranked two in our rankings,” he said. That means the fund has been performing, delivering stable returns over a period of time. Its performance in three, six and nine months has been largely driven by stock selection, especially in the large-cap category.
The fund has relatively higher exposure to large caps compared to the category. Within the debt portfolio, it has taken exposure into some securities rated lower than AAA. So, performance from the large caps and relatively higher equivalent from the sub-AAA exposure has helped the fund’s performance.
Watch the full interview here:
Edited excerpts from the interview:
The five categories that we would like to talk about are the Flexi Cap category, the Mid Cap Funds, the ELSS schemes, the aggressive Hybrid Funds and the Corporate Bond Fund. I would like to start off with the Flexi Cap category. Tell us your observations about how the category has done. We'll start off with the number one brand which is IDBI Flexi Cap Fund; it just doesn't come into the conversation at all through the last 12 months, and here it is sitting at the top of your pile?
Piyush Gupta: Flexi Cap is one of the largest categories, in fact, the second largest category in the equity universe. While it is a Flexi Cap category, we don't see much variation among most of the funds. In terms of market capitalisation allocation, it is largely dominated by large cap when we look at the last three years of the portfolio.
Coming to the IDBI Flexi Cap Fund, it is among the smallest funds in the category, close to about Rs 400 crore, so a fairly small fund. The fund has improved its performance in the latest quarter.
Having said that, the fund was ranked two in the previous quarter as well, which means that the fund was falling in the top 30 percentile in our universe that we were ranking even earlier.
And even before the previous quarter, the fund was ranked two in the earlier quarters as well, which means that the fund has been delivering returns closer to the top quartile or top 30 percentile in the last three-four years or so.
When we rank the funds, while we look at the performance, we also look at portfolio-based parameters, we look at how diversified the portfolio is, whether there is adequate liquidity in the underlying portfolio–these parameters are also looked at.
For this particular fund, when we look at diversification at the company level, it's a fairly diversified portfolio. Even at the industry level. While it is a small fund, its diversification is closer to the category average, which is unlike other smaller funds. Typically, you'll find a higher diversification as well as a fairly good amount of liquidity given the smaller size of the fund.
When you look at its performance, it's during the one-year period and nine months where the fund has actually given the highest (returns) within the category, which has obviously helped the performance of the fund.
When we look at its portfolio over the three-year period, it has seen some shift. Initially, it was dominated by or rather had relatively higher allocation to small and mid-cap stocks. It’s in the recent period where the fund has a larger allocation to large caps which also meant that in the last quarter where small and mid cap gave negative returns, large caps were flat. It helped the fund in its performance in the recent quarter.
There are some stocks which have worked for the fund, stocks which are part of pharmaceutical, IT, and banking. Some of these sectors have actually helped the fund in generating higher returns compared to the category.
On the flip side, UTI, which has been doing not so badly in probably the whole of 2021 has slipped two places–from number one to number three. What happened here?
Piyush Gupta: There is a decline in its performance in the recent quarter. In fact, it had the least returns within the category. The fund was doing well earlier, which meant that its three-year performance is still higher than the benchmark or the category. It is in the recent period where the performance has slipped.
Given its good performance in the earlier period, the fund also has a fairly large AUM. It's close to Rs 24,000 crore which means that when we look at the liquidity in the underlying portfolio, it is relatively weaker compared to the category.
Even when we look at diversification, while it is fairly diversified at a company level, at a sector level the fund has a lesser number of sectors. For instance, its stockpile holding is about 63% compared to category average of 57%.
The other factor that one needs to look at here is the fund had a higher exposure to mid-cap stocks and continues to have that exposure even in the latest quarter. When the performance turned for the mid-cap universe, the fund also got adversely impacted in its overall performance.
How do you reckon viewers and investors can make use of this intelligence and the rankings that you bring to the table?
Piyush Gupta: When we put out these rankings, the objective is to cover as many funds as possible. Also, when we look at the performance or the ranking, we don't just look at the performance, we look at the portfolio construction of the fund, which in a way plays out as you move ahead in terms of its performance.
Ideally, users should look at this ranking as a filter, one of the factors when they are deciding on the portfolio construction or shortlisting of funds. They need to look at their own risk appetite. Within a category, there is a big divergence in terms of portfolio construction and the underlying risk to the portfolio.
While we look at the performance, we look at the portfolio base attributes also, and when we publish these rankings, the rankings are available for each of those parameters. So, you know that this particular fund is doing well; while it's doing well in performance, maybe its performance is relatively more volatile compared to the category. Or for that matter, the fund has a relatively higher diversification or a higher concentration depending on the fund we are looking at. And so all of these parameters are there and their rankings are available which viewers can refer to.
Let's move on to the next category which is Mid-Cap Funds. Not surprisingly, that one Mid-Cap Fund has climbed atop the table. It was anyway doing well. It's number one along with PGIM Fund. I see Quant Funds doing well across a lot of categories, at least in terms of absolute returns. Why is it that Quant has moved on to the number one position, is it absolute returns or it's a mix of other factors too?
Piyush Gupta: All of their funds, especially in the equity category, their assets under management even though it's still low, but when we look at their portfolio over the period of time, the fund typically has had a good amount of churn, and the portfolio that they construct is fairly concentrated.
So, on an average, you will find about 25 stocks in the portfolio compared to the category where you will have about 50 or 60 stocks.
And here, we are looking at mid cap, they hold a fairly concentrated portfolio which means that some of the stock selection that they do, if they work that, then it sort of translates into the performance.
Second is there is a good amount of churn. When we look at their portfolio, over the last three years, there were about 190 odd stocks which entered and exited in the portfolio. So, a fairly good amount of churn which means that the stocks are not held for a longer period of time. They are held for a shorter period of time and then exited as and when the returns are realised. This also means that the volatility in the performance is high and, in fact, it ranks five in our ranking when we look at the return volatility in this particular fund.
The concentration is significantly higher which means that it ranks lower on industry and company concentration parameters. Given that it's a smaller sized fund, liquidity parameter that we look at is where it runs higher.
So, that's on Quant and a few reasons on why it is number one compared to it being number two in the rankings given by Crisil in the last quarter. Now, the UTI Fund which has again slipped is the UTI Mid Cap Fund. You enumerated some of the reasons when you were talking about the Flexi Cap Fund category. Would the same reasons be applicable to the Mid Cap Fund as well?
Piyush Gupta: Yes, similar. In the equity category, performance is the key factor when it comes to ranking and it drives the ranking. To some extent, a decline in its performance, especially in the last one year, has meant that the fund has slipped into the lower ranking which is rank three.
Its three-year performance is still higher than the category average, given the fact that the fund was doing well in the earlier period. The fund is, I would say, mid-sized within the category which means that in terms of liquidity, it is aligned to the category average.
Fairly diversified portfolio both at an industry as well as company level. Some of the stocks which didn't do well–one forming part of sectors like consumer durables, banking, auto ancillary, which led to decline in the performance.
There may be tough times in general for a bunch of UTI funds, which have exposure to the mid cap, and that's why even the UTI Mid Cap Fund has fallen in the rankings by a spot to number three.
Now, it's important to highlight that If you want to save taxes, you shouldn't do it in the month of January-February-March for that year. It's a good time to start your ELSS investments if you haven't already. Piyush has told us how you should use rankings in conjunction with some other parameters and your own study to select a fund. But purely from a ranking perspective, one of the funds that has held its spot is the IDFC Tax Advantage Fund. In fact, Quant IDFC and BOI AXA have held onto their positions.
Piyush Gupta: IDFC again is the fund which has been ranked one, not just in the last two quarters, in fact in the last four quarters. The fund performance has been fairly consistent when we look at the last four year’s returns.
In terms of performance, the fund has delivered returns higher than the category and also benchmark across all the timeframes.
Now, when we look at its performance, let's look at the portfolio first. The portfolio has had relatively higher exposure to small-cap stocks over the last three-year period, which has sort of helped the fund in its performance. Given the fact that when you look at three-year returns of small cap, it is highest among all the capitalisation categories we have.
In terms of portfolio attributes, the fund is fairly diversified both at the company as well as the sector level. The liquidity in the portfolio is slightly weaker compared to the category.
The stocks which sort of helped its performance were in the sectors like software, auto, metals, and largely in the small and mid-cap space, which kind of helped maintain performance over the period of time.
They actually chose the right kind of mid-caps as opposed to some other fund houses which may not have exposure to the right mid-caps, as a result of which those lost the rankings and this fund actually maintained its rankings.
Piyush Gupta: The fund has also maintained the small cap and mid cap allocation consistently for a period of time. We look at a three-year period, that’s where you have a higher performance in the small cap category.
Two fund houses have lost rankings on the tax saving fund side, both of which are believed to be adhering to the principles of buying high quality stocks. Axis has slipped two positions from number three to number five, and Mirae has slipped one position. Now, why is it that these funds have gotten lower rankings?
Piyush Gupta: It's a slight decline in Mirae’s performance. We ranked the fund on a scale of 1 to 5, and the fund has moved from 2 to 3, so it’s a slight decline in performance, which has sort of led this fund to slip.
This is a fund which used to do well earlier. It used to be among the top ranking funds for a fairly long period of time, which meant that its three-year performance is still good. It's only in the recent period where there is a decline in its performance.
Over and above that, the fund typically has maintained higher allocation to large cap. So, when you look at the portfolio over a three-year period, the fund has maintained higher allocation to large cap compared to the category average.
In the recent period, of course, it possibly would get benefited in the short term, like three months, where large caps have started doing better compared to small and mid-cap. It's only in the medium-term period –1-1.5 year period–where the performance has slipped.
Going back to the portfolio base attributes, given its larger size, the liquidity in the underlying portfolio is weaker, the volatility of the fund has also been higher. We looked at the portfolio churn ratio for this fund and compared it with the other funds in the category. We found that there is a relatively higher churn in this portfolio compared to the category.
Even the volatility in the performance has been higher for the fund compared to the categories that we have seen.
In Axis, do you reckon that the performance got impacted quite dramatically in quarter four, or was it anyways dwindling and then took a bit of a nosedive? I think a lot of quality stocks did take a nosedive. Unfortunately for the fund house, it is involved in a set of news flow which is not the most favourable.
Piyush Gupta: It’s the recent period where the decline in performance has led to its slippage, so it's moved from rank 3 to 5.
When you look at the performance of this fund, three months and six months is where the fund had least return among the category, so minus 9% for a six-month period, which was lowest for the category which resulted in a decline in its performance.
Historically also they were maintaining a relatively smaller number of stocks in the portfolio, which meant that diversification was lower compared to the category. Given its larger size, even the liquidity in the underlying portfolio is relatively weaker compared to the category.
So, it's the decline in the performance in the recent period, along with the concentration risk in the portfolio that the fund has been maintaining, that has resulted in the decline in its ranking.
Can you talk a bit about whether aggressive hybrid funds are good as a category to invest into currently or would you believe that there could be better categories? ICICI Pru Equity and Debt Fund has climbed to the number one position in its category. On the flip side, the PGIM Fund which has lost its ranking quite significantly from number one to number four?
Piyush Gupta: In aggressive hybrid, given that you have a mix of equity and debt, I would feel that it's a category which is quite relevant for the investor, especially in the recent period where we have seen quite a bit of volatility in equity markets.
This is a category which provides some sort of balance to the overall portfolio. So, from the category perspective, it's still an important category for investors to look at.
In the past, we have seen that there are times when the performance of balance, as we used to call it earlier, some of the funds used to deliver returns on par even with the large cap funds. That was primarily because there was a bit of stability that would come in during the downside in the equity market. So, to that extent, this category is still relevant.
Let's talk about the two funds.
Piyush Gupta: While you have a balance between the equity and debt, within equity typically you will find a skew towards large cap within the portfolio when you look at the overall category.
Now, if you were to look at ICICI Prudential Equity and Debt Fund, which has moved from 3 to 1, it's a fund which has fairly large assets under management within a category.
If you were to go back, maybe the quarter before the previous quarter, it was ranked two in our rankings, which meant that it has been performing, it has been delivering stable returns over a period of time.
In the recent period, it's largely driven by its performance in its portfolio over the three months, six months, nine months period. And its performance has been largely driven by stock selection, especially in the large cap category.
This is a fund which has a relatively higher exposure to large caps compared to the category when we look at the numbers.
Plus the fund has also recently taken exposure to, within the debt portfolio, into some of the securities which are rated lower than AAA.
It has meant that performance from the large cap stocks, relatively higher equivalent from the sub-AAA exposures has helped the fund in its performance.
When we look at other portfolio base attributes like diversification, credit quality, liquidity, scores are relatively lower in the ranking.
That's also to do with the fact that the fund has fairly large assets under management. Given the fact that the fund has taken exposure to some of the sub-AAA exposures, the asset quality ranking or the ranking on the credit quality parameters is lower for the fund. Diversification is also weaker.
Are there any other aspects about PGIM Fund which led to such a sharp fall in the rankings for the fund?
Piyush Gupta: It is also a case of single exposure which led to its decline in performance. PGIM has exposure to one of the global feeder funds, which has led to its decline in performance.
We have seen globally in the equity markets quite a few large cap stocks in global markets have seen a decline, and to that extent that feeder fund declined in NAV to the extent of almost 13% in the last one quarter, and impacted its overall fund performance.
In its latest portfolio, the fund has further increased its exposure to the global feeder fund. So, that's primarily the reason for its decline in the ranking.
The opinion on Corporate Bond Funds is fairly mixed. But if Nippon and Sundaram have done very well and climbed rankings, DSP Corporate Bond Fund has slipped in rankings. Talk a bit about this.
Piyush Gupta: Corporate Bond category invests primarily into AAA and above rated securities– sovereign or AAA–and which means that largely the performance is driven by the duration management in the portfolio.
There is no limit as far as the SEBI definition is concerned in terms of duration of the underlying portfolio unlike other categories, which means that active duration management primarily drives the performance of this category.
At an overall level, we have seen that there is a steady reduction in the duration of the funds within the category, and it is in line with the hardening that we have seen especially in the last six months in the debt market.
So, to that extent, the funds who are able to manage the duration in the portfolio actively, they were able to generate superior returns compared to the other funds.
When we look at Nippon Corporate Trade Fund, the funds had a lower modified duration compared to the category which kind of helped its performance.
If we look at the other parameters like asset quality, it still has allocation which is relatively higher compared to the category as far as the sub-AAA rated instruments are concerned. So, to that extent, the asset quality of the fund is a bit weaker, which also translates into weaker liquidity of the fund.
As far as the company level diversification is concerned, it's a fairly diversified portfolio. None of those exposures are exceeding the threshold that we look at, at an issuer level, for the debt categories.
In the exposure to sectors, we look at exposures which are vulnerable in the current market condition and identify those sectors in the portfolio.
Here we have seen that they had some exposure into sensitive sectors in the previous quarter, which they have reduced in the latest quarter.
They had some exposure to wholesale finance in the previous quarter, which kind of had a negative impact on sensitive sector exposure parameters. Liquidity again is relatively lower given that its asset quality is weaker compared to the category.
So, if despite all of this, it has moved to the number one position, then the positives outweigh the negatives. The contra works for DSP Corporate Bond Fund because that slipped in the rankings.
Piyush Gupta: DSP is a fund which follows a roll-down strategy, which means that they construct a portfolio at the beginning of the period. Typically, it's a three-year portfolio, and then they allow that portfolio to mature over the period.
Having said that, if there are any inflows, they purchase securities in a manner that those securities mature at the end of the three years.
It also means that the ranking for this particular fund tends to be volatile. Like I mentioned earlier, for this particular category, duration management is what determines the performance of the fund most of the time given the fact that there’s very little which is there in the credit front.
This particular fund had their portfolio maturing somewhere in the month of February and March, which meant that they constructed a fresh portfolio in the month of March with a duration close to three years, which adversely impacted its performance because we saw hardening in the yield in the latest quarter.
The other factor, which sort of adversely impacted its performance, is because the portfolio was getting mature, they were earning excessive cash especially in the month of January and February, which impacted its performance in the ranking.