I have received a note from ABSL MF announcing their ABSL Nifty Next 50 ETF. The note outlines the growing category of ETFs around the world and in India. One statement caught my eye.
Popularity of ETFs have increased particularly in 2018, when Large Cap funds across industry found it difficult to beat benchmarks.
This is a big confession coming out of one of the largest fund houses by size.
Now, I am wondering if this is a signal to the existing investors in the large cap fund of ABSL to exit and money to the Nifty Next 50 or any other large cap index fund / ETF.
The large cap fund from ABSL is the Frontline Equity Fund. At Rs. 20,000+ crores in AUM, it is one of the largest fund schemes in the industry. Not just that for that size of the fund, it commands one of the highest expense ratios – 1.17% for the direct plan and 1.97% for the regular plan.
The fund is manned by the top guy, CIO – Mahesh Patil.
Before the SEBI re-categorisation and stock universe definition, the fund picked its investments from the top 200 space. Post SEBI guidelines came into effect, it is now restricted to the top 100 space.
The fund has failed to outperform its benchmark over the past few years. You can refer to any of the online sites such as ValueResearch or MorningStar to check this fact.
As mentioned in ABSL’s own the ETF note, going forward, the fund house is unsure of outperformance. The high expense ratio will definitely work against this effort.
That’s where the new Nifty Next 50 ETF comes into the picture. Mind you, ABSL already has a giant cap, Nifty 50 ETF, but now it is expanding its bouquet of passive funds / ETFs. Why?
You see, a business mind is at work here. The shifting trend towards passive investing is visible. Online platforms, discussion forums and social media are abuzz with how the large cap space is becoming difficult to generate alpha.
The fund house becomes aware of this buzz and launches a product to get investors money and pocket a fee on it. Neat!
It’s the money, stupid.
Well, the fund house will mind its business. You have to mind yours.
As dramatic as it may sound, I ask the question – if the found house is losing faith in its own proposition of the actively managed large cap scheme, how do you retain yours? Is it not time to exit the large cap ABSL Frontline Equity Fund?
Vipin,
Why ABSL Frontline or any actively managed large cap funds fails to beat Index . Do you have any post for me to clarify this doubt.
Will it be same for other MF categories to follow in future. Then indexing is the way to go.
Vandhi, for a discussion, how would you theorise that?
So, now do we need to exit Large cap funds, which are considered to be one of the safest categories of Equity mutual funds, too?
completely depends upon what you expect for your portfolio and from your fund. https://unovest.co/2018/12/chasing-alpha-arent-market-returns-sufficient/
No need to exit ABSL FRONT LINE EQUITY FUND just bcoz of ETF.. If u follow this philosophy than one should exit all large caps and simple go to ETF. thus us just temporary phenomenon that in volatility fund is not able to beat benchmark else.. Stay focused n invested in equities as basic rule.. U will. Gain finally
I guess you are not aware of the SEBI reclassification rules for MF categories that kicked in 9 months back. Prior to that, largecap funds were allowed to invest in midcaps and small caps without any cap. But after the reclassification, largecaps are mandated to invest atleast 80% of the AUM in top 100 stocks. This has given very little leeway for a fund to invest in midcaps or smallcaps to generate alpha.
And generating alpha from just the top 100 stocks is not easy.
This is the reason why largecaps funds might struggle to beat its index.
Add relatively high expenses of 1.2 to 1.3% for direct plans, they may underperform in a big way.
So index funds is better in largecap category.
In my limited knowledge, prefer index funds to Large cap funds. For a bit of alpha, use the Large & Midcap category. Choose Liquid fund for debt portion. Keep it simple, if you can.
Simple is the best!
Vipin,
SBI Bluechip Fund charges 1.32% for direct plan and the combined AUM of direct and regular plans is 20,000 crore.
I wonder these funds charge more expense ratio because of the effort they put in attempting to generate alpha which is anyway looking unlikely on a consistent basis going forward.
The index funds for Nifty 50 and Nifty Next 50 from some fund houses charge under 0.5%. Clearly its time to move on to index funds in largecap category.
The high expenses on largecap might actually be pulling down the returns below the index.
Effort no doubt but it’s also about what the fund houses can get away with. In case of SBI, the customers are unsuspecting relying on the trust around the name. I believe the bank provides most of the volume here. They don’t check vis-a-vis other funds, category or index.
Absolutely right that lot of SBI’s MFs business comes from SBI the bank.
Now SEBI simplified expense ratio calculations which says the direct fund expense ratio is the income for the fund house (from regular option as well). For the regular fund, the expense is the direct plan expense plus commissions paid out.
So simply calculating what SBI MF is pocketing on the blue chip fund, its 1.32 % of 20,000 crores per year. Thats a mindboggling 265 crores a year on this fund alone.
Same applies for ABSL Frontline, nearly 250 crores a year.
Is it all worth it for funds struggling to match the indexes (TRI) for few years now?
And its not going to get any better.
Despite SEBI’s re-categorization, can’t the fund managers(FM) still generate alpha by altering the investment percentage in companies that have higher/lower potential for growth? To my knowledge, percentage contribution of a certain stock to be in the benchmark is determined by many factors but future growth potential may not have been directly taken into consideration. Can’t the FM recognize such stocks to alter the % allocation and also churn more frequently (both are supposedly key FM skills) than the benchmark to generate alpha? I’m I missing something?
Well, there are all kinds of ways that FMs can use to beat their indices or seem to appear so. The big question here was about what a fund house is communicating to promote its new fund.
Please don’t get me wrong. I totally appreciate the intention of this article. My response wasn’t aimed at this particular article but my 2 cents on the broader idea of active vs passive fund management.
Hello Sumanth, your comment was well understood. Thanks 🙂
In my opinion, there will be some large cap funds beating the index, but the chances of us investing in them is what makes it tricky.
I’ve a question. Are retail investors and mutual funds (which is just a proxy for retail) still a minority when it comes to the available free floats? I’m just thinking, if everyone moves to the index, wouldn’t the index itself become self fulfilling and investing in them defeat its ultimate purpose? Don’t we need enough participants outside of the index and etf investing to ensure the index results in the average?
Passive (Index) or Active is a result of an investor belief system. Do you want a committee to decide your portfolio or a more qualitative fund manager? Do you believe only low cost is the way to win, or a quality portfolio of carefully selected securities?
However, as you rightly pointed out, if most people start indexing, beating the index purely on performance will become very difficult. The downside is that every type of business (good, bad, & ugly) will start feeling privileged and their only target will be to get into the index.