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Mutual Fund Performance Review & Strategy Insights – December ‘18

Investors are advised to restrict their equity allocations to sub-50% for now, and adopt a wait and watch approach for the next 4-6 months

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November was a breath of fresh air for domestic Mutual Fund investors, who have begrudgingly borne the burden of a two-pronged bear market that have affected both equity and bond markets since the start of the year. For the first time in several months, we saw several large cap funds delivering in excess of 5% returns intra-month. Even passive ETF’s linked to large cap indices delivered impressive returns within the month, as the NIFTY rallied nearly 5%. Small & Mid Cap funds didn’t join the party though, with most of them failing to deliver any returns in excess of 2%.

Equity Funds
The surprise winner in the equity Mutual Fund space turned out to be Canara Robeco Consumer Trends fund, a thematic fund that focuses on the consumption theme. The fund, which delivered an impressive 1-month return of 8.17% last month, has names such as HUL, Britannia, Asian Paints and ITC amongst its top holdings. TATA Banking & Financial services fund was the lone warrior from the BFSI theme space that captured a spot in the top 5, mainly because of its adroit decision to shy away from YES Bank, which took the drubbing of a lifetime last month. Two funds from the Motilal Oswal stable, both blue chip centric, figured in the top 5 as well – their bottom up investing strategy paying off as the market rallied.

Debt Funds
GILT funds and long-term debt funds continued to rule the roost for the second consecutive months, and bond yields plummeted in tandem with severely cooling crude prices. With crude dipping below $60/bbl just a few weeks after experts were predicting that levels of $ 100/bbl were imminent, we’re likely to see an improvement in core inflation numbers as well as fiscal health parameters, muting chances of an immediate rate hike from the RBI and driving down yields. The clear outperformer was Reliance Nivesh Lakshya Fund, which is a long-term GILT fund that investors are supposed to buy and hold. Reliance Nivesh Lakshya has unintentionally ridden the wave of a massive drop in yields, which has led to a bonanza for rate sensitives. The fund has a =n average maturity exceeding 25 years and a modified duration exceeding 10.14 years – significantly higher than the category average for Debt: Long Duration (8.46 years). Credit Risk Funds and Corporate Bond funds turned out to be a mixed bag, with most of them delivering returns in a tight band of 0-2% within the month.

Hybrid Funds
Hybrid funds put on a good show in November, with many of them delivering positive returns within the month. Balanced Hybrids and Aggressive Hybrids that have a predominantly large cap focused approach outperformed the market, while small cap or corporate bond-oriented hybrids, or hybrids that parked most of their debt portfolio in cash/cash equivalents underperformed as they sat on the side-lines while yields dropped like a rock.

Mutual Fund Strategy Insights
The year 2018 has mostly spelled consternation for Mutual Fund investors, with most debt funds delivering sub-FD returns and most equity funds failing to cross double-digit returns. What’s worse is the fact that earnings growth hasn’t quite recovered at the pace that was expected, with Q2 results proving to be a mixed bag and the NIFTY’s P/E ratio still hovering around the 26X mark. Investors who are deploying money based on short term lagging trends will find themselves in a frustrating position as trends quickly reverse. This is the time to build out a solid, long term portfolio that’s spread across market caps and asset classes. A thematic allocation of 20% or so could be essential for delivering outperformance. The markets are quite likely to move back and forth in a range till the general elections next year, when the next trend will be firmly defined.

Investors are advised to restrict their equity allocations to sub-50% for now, and adopt a wait and watch approach for the next 4-6 months.

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