A majority of schemes report positive alpha, shows a Business Standard analysis of data from Value Research. A positive alpha denotes a scheme which generates higher-than-benchmark returns after adjusting for risk taken. It is a key indicator of whether a fund manager is able to add value to investors. Positive alpha is seen between 60 per cent and 80 per cent of largecap, midcap, smallcap, and flexicap funds, even as passive funds, which don’t seek to pick stocks and merely replicate indices at low cost, have gained in popularity.
Active smallcap schemes had the highest median alpha of over 2 per cent. The rest of the categories exhibited between 0.8 per cent and 1.3 per cent alpha on a median basis.
Kartik Jhaveri, director, Transcend Capital, noted that many of the best-performing schemes in each category are now passive in nature. But they track specific indices, for example, large public sector companies or an equal-weighted version of a popular index. Such schemes may do well during specific market cycles but it is difficult to anticipate which would be the flavour of the season in the future. Active fund managers have a role to play during periods of high volatility such as during the ongoing West Asia conflict. Fund managers in active schemes are not bound to buy the same stocks as the index they track, unlike in passive schemes. This gives active managers the opportunity to take large positions in stocks which are at attractive valuations and significantly outperform when the tide turns. “They have the flexibility,” he said.
Passive schemes can be used by investors who want to take a bet on a sector or a theme, if they believe that it is likely to outperform, added Jhaveri.
Active and passive schemes both have a place in investor portfolios for the time being, with advantages for each, suggested financial planner Jayant Vidwans. Passive funds will likely pick up more steam as the market matures, mutual fund penetration increases, and it becomes harder for schemes to outperform indices.
Survivorship bias may play a role in the share of funds which are outperforming, noted Suresh Sadagopan, founder, Ladder7 Financial Advisories. Schemes which are doing poorly are often discontinued or merged into others, which can affect the numbers. Sadagopan believes that largecap schemes remain most vulnerable to underperformance relative to their benchmark, which could result in more investors switching to passive alternatives that track the index instead of trying to outperform by diverging from index holdings. Funds investing in companies lower down the market capitalisation pyramid may do better for now, he suggested.
“Going forward, this will probably catch up with midcaps also. It is also a factor of information asymmetry,” he said.