personal finance

The benchmark story: How equity indices hoodwinked Indian fund managers


The polarized performance of the Indian benchmark indices over the past 12 months supported by a handful of stocks and low overall positions of FPIs and MFs in those stocks would probably suggest that most actively managed funds would have trailed the market indices. This may be a good wake-up call for the industry to review the relevance of benchmarks in achieving the financial security objectives of households and investors.

Only eight of the BSE-30 Index and 17 of the Nifty-50 Index stocks had outperformed their respective benchmark indices. The range of performance of stocks in various benchmark indices was quite large. The best performing Sensex stock was up about 65 per cent and the worst was down about 30 per cent while the index was up about 21 per cent. Among Nifty stocks, the same were 70 per cent, 45 per cent and 19 per cent, respectively. The same pattern is seen repeating across wider benchmarks. Interestingly, the performance of various market indices gets progressively weaker with the ‘breadth’ (number of stocks) of the indices, which is the antithesis of investment management (portfolio diversification to reduce risks or produce alpha).

Only a handful of stocks contributed to the performance of the index, with most lagging the index. Only three stocks – RIL, TCS & Infosys – had contributed about 50 per cent of Nifty’s performance. The strong performance of most of the outperforming stocks reflected the market’s changed view on the stocks led by weak macro (IT, pharmaceuticals) and ‘narratives’ (consumption stocks, RIL). The performance of the Indian market in local currency terms had been supported largely by strong performance of the IT stocks, which in turn ironically performed as a result of the deterioration in the macro and the resultant depreciation in the rupee. The market performance was more muted in US dollar terms, flat CYTD for the Nifty-50 Index.

The ownership of the outperforming stocks (certain consumer and IT stocks, RIL) over the past four quarters suggested most funds had low ownership in such stocks on an overall basis relative to the current weight of these in benchmarks. Also, certain funds might have disproportionately large positions in the outperforming largecap and midcap stocks, which could have enabled them to do relatively better.

It remains to be seen whether this kind of market moves active fund managers away from building portfolios around the benchmark stocks.





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