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BW Businessworld

A Passive Exercise For Active Results

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Over the long term, you cannot beat the market,” says Sanjiv Shah, managing director and co-CEO, Goldman Sachs Asset Management (GSAM). “So if you keep costs down, and follow the beta (or the index), investors will gain.” The solution, therefore, appears to be to allocate assets and invest cheaply in a simple, market-driven index.

Think of that approach as ‘passive’ investing, as opposed to ‘active’ investing. Rather than fret about how the market is doing and conducting your own research into the companies that you would like to buy, and getting worked up over performance, let an index-linked fund do all the hard work. Readers may recall that GSAM acquired Benchmark Asset Management — which originally launched the Junior BeES in April 2011.
2. IDBI Nifty Junior Index Fund
3. JM Core 11 Fund
Granted, for many people that goes against the investing grain. Primarily because most investors look for total or absolute returns (in market terminology, alpha) as opposed to relative (to market indices) returns, or beta. They may even be willing to pay for it. But what Shah says illustrates the performance consistency problem that most mutual funds face, and the difficulty in identifying and retaining the right fund manager. He may be right; most research does suggest that mutual fund returns are more consistent with asset allocation than with asset managers. Which also explains why GSAM goes in for exchange-traded funds or ETFs. And it has worked. The GS Junior BeES tops the small cap category in the Businessworld mutual fund rankings. In February 2003, when the fund was launched, its average assets under management (AAUM) totalled about Rs 1.21 crore. Nearly 10 years on, the AAUM stands at around Rs 90 crore.

The fund invests in the 50 stocks that comprise the National Stock Exchange’s (NSE) Junior Nifty index. ETFs appeal to investors who do not like the vagaries of the variable returns that investing directly in stocks entail. In some sectors, returns on stocks of different companies may be too close to each other. And here is the kicker: ETFs pass on the dividends they receive on the stocks they have in the portfolio, which is an additional, even if small, benefit. “ETFs give actual market returns, because they do not pay distributors, the investor does,” Shah points out, adding, “that is one way they keep costs down.” The model could be changing, Shah acknowledges, though it is unclear how things will evolve. But the regulatory environment will play a key role, he says.

Indexation — as in replicating an index — may not yield the greatest alpha-type returns, but excess returns are possible; sometimes they can be astonishing. The Junior BeES returned nearly 49 per cent in 2012, compared to the category average of about 33.5 per cent. The CNX Nifty (the senior index, if you like) returned under 28 per cent. Three sectors — banks, consumer durables, finance companies — make up over 50 per cent of the fund’s sectoral allocation. The top five stocks account for just over a fifth of the portfolio’s value and, predictably, are those of two banks, two consumer goods companies, and a media firm. The rally in the last four months of 2012 was kind to these sectors.

YES BANK 3.57%
*CNX Nifty Junior. Data as on 31 Dec. 2012. Cash and cash equivalent are not considered for holdings
Source: Ace MF database

Compared to other index funds — many like ICICI Prudential Junior Nifty and IDBI Mutual Fund Junior Nifty are index funds, not ETFs — the Junior BeES is a poster boy for the category; but ETFs are not a big part of the mutual fund universe in India, and account for less than one per cent of the total industry’s AAUM. But interest is growing; there are over 82 ETF schemes (most of them are gold ETFs). So adding the Junior BeES to your portfolio may not be a bad investment idea.


(This story was published in Businessworld Issue Dated 11-02-2013)