The Mutual Fund Show: What Experts Make Of Crisil's Ranking Of Schemes
The Crisil rankings are published quarterly and covers around 25 categories in which various parameters are analysed.
Ratings agency Crisil recently published its latest Mutual Fund Ranking for the quarter-ended June 2023. It has ranked various funds in the large-cap, mid-cap, and small-cap categories.
Piyush Gupta, director-funds research at Crisil Market Intelligence and Analytics, laid out the different aspects and factors that went into collating these rankings.
The Crisil rankings, published on a quarterly basis, covers around 25 categories in which a combination of performance and portfolio-based parameters are analysed, Gupta said. On the performance front, they look at the average rolling return to measure the performance of the fund over the last three years. For measuring risk, they use standard deviation or volatility for the same period.
"Apart from that, we also look at portfolio-based attributes like diversification of the portfolio, at the company and also at the sectoral level, and also, we look at the liquidity of the underlying portfolio. All of these parameters are combined together with respective weights to come up with final rankings," he told BQ Prime.
Large-Cap Fund Rankings
HDFC Top 100 Fund, ICICI Prudential Bluechip Fund and Nippon India Large Cap Fund are the top funds in the large-cap space.
Talking about the Nippon Fund, Gupta said it has been ranked number one for the last five quarters. The fund has a higher exposure to small and mid-cap stocks as compared to the category. Its exposure to banking stocks and lower exposure to IT stocks has contributed to its performance.
The HDFC Top 100 Fund has a more stable portfolio and its key contributors are power and financial services stocks, leading to their higher performance. Likewise, ICICI Prudential Bluechip Fund also maintains lower portfolio churn and its key contributors have been some of the large-cap stocks, he said.
On the underperformer Axis Bluechip Fund, Gupta said the fund maintains a concentrated portfolio, "which means that the exposure to individual stocks is higher in the fund and these stocks have remained in the fund for a long period of time, which also underperformed the broader market indices".
Red Indicator For A Fund
The recency bias factor is very high in the mind of investors and that has to be done away with, said Mohit Gang, co-founder and chief executive officer of Moneyfront.
According to him, six to eight quarters of continued underperformance is a good factor to consider the merit of a fund. That "warrants for a significant change in the objective of the fund, the fund manager or something in the philosophy of the overall fund house", he said.
Small-Cap Funds
When it comes to investments in small caps, Juzer Gabajiwala, director at Ventura Securities, said the segment is extremely volatile and should only be a part of the portfolio for long-term allocation. "It is an ideal time to start an SIP in a small-cap fund," he said.
Over a three to five-year horizon, a large-cap allocation can work for an investor, while mid caps and small caps would require a longer time duration and tolerance of volatility, he said.
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Edited Excerpts From The Interview:
How is the Crisil mutual fund ranking report constructed?
Piyush Gupta: So, these are the rankings that we publish on a quarterly basis, covering about 25-odd categories. Today, since we are talking about equity funds, I will talk about the methodology that we cover for these rankings.
So, in the case of equity funds, we will look at a combination of performance and portfolio-based parameters. On the performance front, we look at average rolling return to measure the performance of the fund over the last three years. For measuring the risk, we use standard deviation or volatility for the same period.
Apart from that, we also look at portfolio-based attributes like diversification of the portfolio, at the company and also at sectoral level, and also, we look at the liquidity of the underlying portfolio. All of these parameters are combined together with respective weights to come up with final rankings.
How often and how significant are the changes normally in the rankings?
Piyush Gupta: So, on a quarter-on-quarter basis, you wouldn't find too many changes in the rankings. But over a period of time, you will see gradual movement of funds moving either from top to bottom or lower ranks to the upper ranks.
Let's start with the large-caps first, and I see that at the top of the list, we have got HDFC top 100 fund, we have got ICICI Pru blue chip fund and Nippon India large cap as well. What can you tell us about these why these funds are ranked so high?
Piyush Gupta: Yes, in fact I will cover each of these funds one by one. So, Nippon is one which has been ranked number one for the last five quarters, so it has consistently maintained top rank over a period of time. Performance, of course, is a major factor which contributes to the top performance or higher rank in the equity category.
When we look at portfolio construction, what we see is the fund has slightly higher exposure to small and mid-cap stocks compared to the category. Apart from that, its exposure to banking stocks, and lower exposure to I.T. stocks has contributed to its performance.
When we look at HDFC, it’s again a fund which has been ranked one continuously for the last three quarters. In fact, when we look at the last five quarters, we see out of five quarters, four quarters is when the fund has been ranked number one.
This is a fund which maintains a slightly more stable portfolio and has a lower portfolio churn in its portfolio. When we look at the key contributor, it's the power and financial services stocks, which has contributed to their higher performance thereby also having a high rank in this particular ranking.
ICICI Blue Chip is a fund which has again ranked one for the last five quarters continuously. This is a fund which also maintains lower portfolio churn. The key contributors have been some of the large-cap stocks where the fund has maintained a higher rate compared to the benchmark as well as the category which has meant that the fund is ranked higher in this ranking.
Let's talk about the underperformer though Axis Blue Chip has underperformed, why is that?
Piyush Gupta: So, Axis is the fund which has remained five for quite a few quarters. So, this used to be a fund which used to be ranked number one earlier, if you go back into history, but in the last one year or so, it has remained in rank five continuously.
Now, Axis is the fund which maintains a slightly concentrated portfolio, which means that the exposure to individual stocks is higher in the fund and these stocks have remained in the fund for a long period of time, which also underperformed the broader market indices.
So largely it's the higher exposure to the poor performing stocks. Again, it has remained over a period of time that has meant that the fund has not come up in the ranking.
Let's talk about flexi caps, what can you tell us about the winners?
Piyush Gupta: So, in the case of flexi cap, HDFC and JM are the top rank funds in this category. While flexi cap as a category, if you by definition, they are supposed to move across market capitalisation. But at an average level we'll find that the funds typically have a large-cap bias.
Specifically talking about HDFC flexi cap, it's a fund which has again maintained rank one for the last five consecutive quarters. It has a large-cap bias; almost 82% of its exposure is into large-cap stocks. The fund also has slightly higher concentration. Beyond this, some of the key contributors have been the stocks in the banking sector and PSU, which has helped the fund in its outperformance.
When we look at JM, it is a fund which has come up in the ranking over the last one year. It has been ranked number one in the last three consecutive quarters. Its recent performances have actually helped the fund maintain top rank in the category.
Contrary to the HDFC fund, this is a fund which has a slightly higher mid-cap bias or higher mid-cap exposure compared to the category. For this particular fund, stocks in the banking sector have been the key contributor to its performance.
Do any others stand out in terms of a dramatic underperformance?
Piyush Gupta: Not really, the fund rank changes that we have seen in the flexi cap category have largely been one notch, not more than that. So, the funds like PGIM, Bandhan, and UTI which have slipped from the previous rank by one notch in this particular quarter.
You have the Nippon India small cap fund, which by the way stopped lump sum inflows not too long back. What can you tell us about why it has done so well and what are the implications, according to you, of the stoppage of lump sum?
Piyush Gupta: So, Nippon is a fund which was ranked two when we go back one year. In the last couple of quarters, it has moved to the top rank. Its outperformance, especially in the two-year period, has helped the fund to maintain top rank.
When we look at this particular fund, over a period of time we will see that there's a considerable amount of diversification in the fund. For example, the fund holds an average in its portfolio when you look at the month-on-month portfolio.
When you look at the category, the average number of stocks that are held by the funds is about 78, which means that it's a fairly diversified portfolio and which also means that the fund also needs to pick a large number of winners to maintain the top performance.
When I look at the fund allocation, it's the large-cap and mid-cap where there is a slightly higher exposure, compared to the category even though it's a small cap fund. But if you see sectoral bets, especially in the infrastructure, auto, and financial services, which has helped the fund in generating superior returns compared to the category.
You clearly have liquidity as one of the criteria on the basis of which you have your rankings. Is that at all a concern for something like Nippon because of the kind of assets that they hold under management close to Rs 30,000 crore?
Piyush Gupta: Yes, so generally, large assets under management have a negative impact on the liquidity of the fund. When we look at Nippon small cap, the fund is ranked three which is basically the middle cluster of the ranking, so it's still not in the bottom of the ranking as far as liquidity is concerned.
Lot of times the funds manage the liquidity by having exposure to large caps, which is the case in this particular fund. The fund has higher allocation to large cap, primarily to maintain the manager liquidity position within the portfolio.
Could that have a bearing on its performance?
Piyush Gupta: It has been seen in the past that it's the small and mid-cap which has contributed to its performance. So, if the large-caps continue to perform weaker than our mid and small-cap category, then it can have a performance or impact on its performance and thereby the ranking.
Another name that stood out to me was Quant small cap, what can you tell us about the reason for the outperformance of this particular scheme?
Piyush Gupta: For Quant, across all its equity funds follow the strategy which is very different from a typical equity fund. The fund of course continues to remain ranked number one for the last five consecutive quarters. The fund also has a concentrated portfolio.
So, it has a higher concentration with higher churn in the portfolio, continuous churn that we see in the portfolio which is visible in the portfolio construction. What we have seen is we typically look at consistent holding over the period of time, for example, three years.
We don't find too many stocks remaining continuously in this particular fund for a consistent period of time. So, it's largely the stock selection in the small and mid-cap category, which has helped the fund and its performance, and it continues to maintain that consistent performance over a period of time.
Let’s talk about the mid-cap category and again, you have seen considerable flows into this category as well. HDFC mid cap opportunities has outperformed, Motilal Oswal mid cap has outperformed, what are the reasons?
Piyush Gupta: So, HDFC mid cap has at least seen improvement in performance, especially in the last one year. The fund was ranked three when we go back one year in history and now it's ranked one. In fact, it's also the largest fund in the category, which also means that the fund ranks lower on the liquidity parameter while it continues to perform well on the return parameter.
It's also because of the recent performance that the fund has seen improvement in the ranking. One other factor is its higher allocation to small-cap stocks and lower allocation to large-cap stocks, which has helped its performance vis-a- vis the category. Also, one of the common factors which we see in the HDFC fund is the public sector and the banking exposures, which have been a key contributor even for this particular fund.
One of the underperformers here is the ICICI Pru Mid Cap Fund, what are the reasons for the downgrade this time?
Piyush Gupta: So, decline in performance is one of the key factors while it remains similar when it comes to portfolio-based parameters. It's the return that has declined in the fund which has seen the decline in the ranking. I think sectors like media, I.T. and oil and gas, which were underperformers in the broader market, and where the fund had higher exposure, led to its underperformance.
To close this conversation, reinforce the fact, this is based on your study of performance over a period of April, May and June. Correct?
Piyush Gupta: The ranking is carried out based on the performance period of three years and portfolio construct which is for the last three months, which is April, May and June.
Juzer, what do you take from this?
Juzer Gabajiwala: So, it’s very, very difficult, because the returns keep on changing every day, and investors always keep on wanting to look at data, specifically when we are in a world of overload of information. So now it's flashed around everywhere.
So, when you look at the returns, that is the most primary thing, any retail investor and I am talking more from a retail investor perspective, because those are the people who actually keep on coming to us in terms of their investments. So, one of the simplest parameter any investor looks at, what are the returns the fund has been giving and he tries to take a decision based on that.
Now, it is for us to educate the investor in that first of all, like what is the timing horizon, what is the time horizon he is looking at. If he is looking at somewhere between three to five years, then maybe a large-cap can work, but for mid cap, he needs to have a slightly longer time duration, a small-cap when you need to have a much more longer time duration and whether he is in a position to take care of the volatility because small-caps will be more volatile than a large-cap fund.
So, we don't try to explain the need to have a drawdown this much, how will you react to it, because we have seen investors trying to, you know, they panic, they may say that they don't panic, but they ultimately panic when the reality comes in because on the upside, I can absorb any amount of profit. The problem is always the downside. Another thing which we also try to look at is the consistency of the fund manager because even you know, I think because ultimately, he is the guy who runs the fund.
Mohit, what are your key takeaways?
Mohit Gang: I think multiple agencies have multiple parameters to rank various schemes and there is no right or wrong about it. Everyone has a different methodology. Everyone has a different elbow which they follow.
So out here, what I understand is they pay a huge amount of weightage to returns. Now those could be past returns, though to be rolling returns, I am not really sure how the returns are taken into account, and they have parameters of industry concentration, company concentration and liquidity.
Right now, for right or wrong reasons, these are the parameters which they have taken. There could be risk parameters, which someone could be concerned about and as Juzer rightly mentioned, if you consider a risk profile of a client and what risk parameters are the fund displaying.
So, let's say what is the ratio of a fund or beta of the fund and maybe to certain extent, there are software parameters like a fund managers ability, his track record, his longevity with the fund, the fund houses philosophy, what kind of track record the management does have, plus the AUM of the fund to my mind it's also a significant factor, expense ratios, again, could be a large factor.
I think those are all few parameters you can never possibly try and capture all of them. There has to be a subjective layover. Obviously, you meet with your clients, you talk to them, you understand them, you understand the fund and the fund house, you mash both of them together, and then dish it out. Honestly, and I think that's where the role of an advisor also comes into being that he has to perhaps try and match both the philosophies.
But nothing is completely comprehensive, but nothing can be shunned away also, because I am sure they have used good parameters, honestly, those are great parameters which they used. I think metrology has to be given a fair amount of recognition.
How do I adjust my portfolio or the scheme that I invest in? How much time do I give for a scheme that is clearly underperforming?
Juzer Gabajiwala: So, we know it's a very classic thing that the winners just keep on rotating, so we have seen it across the board. So not only like Axis Blue Chip was one of the top performing funds in 2019-20 and today it is at the bottom, HDFC top 100 had been at the bottom, today it is at the top.
So, ultimately what is the underlying philosophy, so important thing is that, at that point of time, you need to start obviously, everybody will start wondering why my scheme is not doing well, and the other fund is doing well, which was actually at the bottom of the pyramid. So, I think the fund house matters, to a certain extent that whether it has strong processes because we strongly believe in everyone having a fund process, that is more important.
Secondly, is there a change in the fund manager? So, if you find that the fund manager also still remains the same and if he has been on the top, and today he is at the bottom, I don't think that philosophy would have changed so much. So, I don't think somebody should tinker with the portfolio, just for the heck of tinkering with it. Most of the time it also depends upon what period you are looking at.
Whether you are looking at a one-year tenure rank, or whether you are looking at a three-year or whether you are in a five year. So, the positioning will also undergo a change and always there's a recency bias because everybody wants to look at the recent performance.
So, people will talk about the one-year return, but we are talking about a three to five-year time horizon. So, I think one needs to be very careful and just doing a transaction for the heck of doing a transaction, there is also a cost involved. In terms of it you land up paying capital gains tax. So, if you are going to pay a capital gains tax and then move into something else.
Mohit, at what point do you say, okay, this can no longer be part of my portfolio?
Mohit Gang: Well, absolutely you have to weed them out at a certain point in time, if they continue to show underperformance and how you define underperformance to my mind is again very, very unique to every advisor's philosophy and how he or she sees this entire universe.
For us, honestly, I think six to eight quarters of continued underperformance or let's say quartile three, quartile four performance, basically is a good enough red segment for us to consider the merit of a fund very seriously. One quarter, two quarters even a year, to be very honest, we don't even bother. Honestly, I don't think that's a true parameter and as Juzer rightly mentioned, the worst part could be looking at the past one-year returns.
The recency bias factor is absolutely very high in the minds of investors and that has to be done away with. Honestly we have seen a lot of stories, a lot of turnaround stories in funds where after two three quarters of significant underperformance they have suddenly shot up because the portfolio fund manager which had a conviction in certain amount of stocks and sectors, which perhaps because of cyclical nature, or because of the rotation factor in the market came into play after a long while and when we judge these funds also, which are ranked in the report, honestly, I think a few of them are very, very good names and they have had significant amount of performance a year back or two years back and we are very hopeful that they will again see the uptrend in the cycle.
So, my sense is yes, eight quarters, six quarters of consistent quartile performance is something that warrants or a significant change in the objective of the fund, the fund manager or something in the philosophy of the overall fund house. Those are few red signals which would warrant coming out of it.
Juzer, your closing thoughts about what individuals should bear in mind right now because there is a risk that is implicit in buying into small caps.
Juzer Gabajiwala: Yes. Like we said, you know, small-caps are going to be extremely volatile, and I firmly believe that if somebody has a longer duration, small-cap should be a part of his portfolio.
But having said that, I think now let us look at it like that today, we know small-caps are giving fantastic returns. Now what can happen going forward from here. Either the small-caps will keep on going up or you will have a correction and they will start going down. So, it is an ideal time to start an SIP in a small-cap fund.
You will not be able to go wrong like if let us say for example, it goes down and I have in fact read in somewhere where the maximum drawdown is you can lose up to 40% to 45%, it can go down. So, let's assume that it goes down and it takes around three years to recover based on the past data, I mean, even if it comes back to the same level because you're doing an SIP you will actually land up making money.
So, if it goes up, you are as it is going to make money but with a lump sum. If you know everything and you think that he will sell everything and put that in small-caps 100%, that's a bad idea.
Mohit, your last thoughts?
Mohit Gang: Look, honestly, I think the rally in small-caps was somewhat overdue. The valuations were very attractive a year back or almost like nine years back, when the small cap index was actually on a P/E basis was quoting below the Nifty 50 index and even the mid-cap index, which has very rarely happened at small-caps or quoting small caps typically quote at a very high multiples, that's been the trend.
So, I think the rally was overdue and getting in a high-speed train now could be tricky. If you are a trained professional, you can actually do that very well, yes, more than welcome aboard. But right now, we have to get in. I think what Juzer said makes sense. You have to go through an SIP, STP route.
Look, SIP, STP route is a universal route for all classes. So, it's not just applicable for small-caps or something. But my suggestion would be that you maintain your asset allocation. I would still say that if you are underweight small caps, which most of the Indian investors were a year back, then it is always a good idea to get the allocation to the right sizing.
However, because of the market movement, if you have gone over small-cap allocations, let's say if you are wanting to have 15% allocation because of the market movements gone 25%, It's an absolutely great idea to get it right.
Basically, if you have earned your money, I think you should just take it off the table and rebalance portfolios accordingly. Don't overdo it. But yes, keep your portfolios aligned to your overall asset allocation.
