Actively managed funds have long been at the centre of debates within the investment community, with proponents and critics offering contrasting perspectives. One key aspect of this debate is the performance of actively managed funds compared to index funds, and the SPIVA (S&P Indices Versus Active) report for Indian equity provides valuable insights into this ongoing discussion.
Mid- and small-cap funds: the bright spot
The performance of mid- and small-cap funds stand out in the SPIVA India Scorecard, especially over the short and medium term. In the first half of 2023, the benchmark S&P BSE 400 MidSmallCap Index rose by a commendable 12.4%. However, what makes actively managed funds shine in this category is the fact that only 45.3% of fund managers underperformed the index during this period.
Zooming out to a five-year horizon, the picture becomes even more compelling. The SPIVA report reveals that just 38.1% of mid- and small-cap funds underperformed the S&P BSE 400 MidSmallCap Index. This suggests that active management in this segment has been more successful in delivering returns that either match or surpass the benchmark over a more extended period. Investors seeking exposure to mid- and small-cap stocks may look at actively-managed funds, given their ability to navigate the intricacies of these markets, identify hidden gems, and respond to dynamic shifts in the investment landscape.
Large-cap funds: a mixed bag
The scenario is somewhat different when it comes to large-cap funds. In the first half of 2023, the benchmark S&P BSE 100 gained 7.1%. However, a significant majority, 58.1% of active managers, failed to outperform the benchmark during this period.
The underperformance trend remains notable over three- and five-year periods, with underperformance rates standing at 86.2% and 92.9%, respectively. These figures paint a challenging picture for actively managed large-cap funds, indicating that a significant portion of them struggled to beat the benchmark consistently over these time frames.
However, over the 10-year period, the underperformance rate drops to 61.2%. This suggests that, over a more extended time frame, active managers in the large-cap space were able to generate relatively better results, narrowing the performance gap with the benchmark.
Beyond returns
The SPIVA report for Indian equity underscores that the active-versus-passive debate is more nuanced and context-dependent. In the case of mid- and small-cap funds, active management appears to have a more compelling track record, with a lower percentage of funds underperforming the benchmark, both in the short term and over a five-year horizon.
Apart from potential of outperformance over benchmark, there are other advantages of actively managed funds.
Actively managed funds can provide access to a wider range of asset classes and investment strategies. This can be particularly important for investors seeking to diversify their portfolios and optimize asset allocation based on market conditions.
Actively-managed funds have the flexibility to adjust their portfolios in response to changing market conditions. This can be beneficial in managing risks during market downturns or in taking advantage of emerging opportunities.
Active fund managers often have research teams and resources to conduct in-depth analysis of stocks and market conditions. This expertise can be valuable for investors who may not have the time or resources to perform detailed research on individual investments. Active fund management may have an edge in identifying mispriced securities and exploiting short-term opportunities.
Investors should carefully consider their investment objectives, risk tolerance, and time horizon when deciding between actively-managed and index-based passive funds. For investors who are willing to tolerate higher level of risk and volatility, actively-managed mid- and small-cap funds could offer a strategic advantage for those seeking higher potential returns. However, in the large-cap space, investors should be more cautious when choosing actively-managed funds and can consider passively-managed index funds.
Nisreen Mamaji is founder of MoneyWorks Financial Services.
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Updated: 19 Oct 2023, 10:43 PM IST