Style Drift of Active Funds Domiciled in India

Style consistency analysis is an essential element of the SPIVA® India Scorecard that helps evaluate the percentage of funds that retained the same investment style classification throughout the investment horizon.  Other than performance and survivorship, the style consistency of funds is an important metric for market participant that can influence their asset allocation decisions.  In the SPIVA India Mid-Year 2017 Scorecard, we observed low style consistency for the five-year period across most fund categories, except the Indian ELSS (see Exhibit 1).

As of June 2012, there were 161 Indian Equity Large-Cap funds available for investment.  Out of these 161 funds, 34 funds were either merged or liquidated over the five-year period ending June 2017, which led to a survivorship rate of 78.88%.  Of the remaining 127 funds, another 68 drifted in style during the five-year period, resulting in a low style consistency of 36.65%.

Similarly, a low style consistency was observed for the Indian Equity Mid-/Small-Cap and Indian Composite Bond categories, which were 49.25% and 41.00%, respectively, over the five-year period. Over the same horizon, only Indian ELSS funds were style consistent.

Exhibit 1: Survivorship and Style Consistency Over a Five-Year Investment Horizon
FUND CATEGORY NO. OF FUNDS AT START SURVIVORSHIP (%) STYLE CONSISTENCY (%)
Indian Equity Large-Cap 161 78.88 36.65
Indian ELSS 36 100.00 100.00
Indian Equity Mid-/Small-Cap 67 85.07 49.25
Indian Government Bond 53 62.26 60.38
Indian Composite Bond 100 86.00 41.00

Source: S&P Dow Jones Indices LLC, Morningstar, and Association of Mutual Funds in India.  Data as of June 30, 2017.  Past performance is no guarantee of future results.  Table is provided for illustrative purposes.

Exhibits 2 and 3 investigate further into Indian Equity Large-Cap and Indian Equity Mid-/Small-Cap funds that survived the five-year investment horizon but were style inconsistent during this period.  In the Indian Equity Large-Cap category, 68 funds changed their Morningstar category definitions[1] during the five-year investment horizon. Of these funds, 43 were reclassified to India Fund Flexicap, whereas 15 others were reclassified as India Fund Sector – Infrastructure, as per Morningstar categories as of June 2017.[2] In the case of Indian Equity Mid-/Small-Cap, 24 of the 67 funds were style inconsistent; 22 of these funds were reclassified as India Fund Flexicap.

Consistency in fund style is important because a change in investment style alters the risk/return characteristics of the fund.  Funds with inconsistent style may reduce the effectiveness of asset allocation decisions.

Exhibit 2: Style Shift Breakdown of Active Funds Over a Rolling Five-Year Investment Horizon
DATA POINT                                       SPIVA CATEGORIES
INDIAN EQUITY LARGE-CAP INDIAN EQUITY MID-/SMALL-CAP
Number of funds as of June 2012 161 67
Number of funds that survived until June 2017 127 57
Number funds that survived and were style consistent until June 2017 59 33
Number funds that survived and were style inconsistent until June 2017 68 24

Source: S&P Dow Jones Indices LLC and Morningstar.  Figures based on SPIVA India Mid-Year 2017 Scorecard.  Table is provided for illustrative purposes.

Exhibit 3: Movement of Funds to New Categories
MORNINGSTAR CATEGORY                                      SPIVA CATEGORIES
INDIAN EQUITY LARGE-CAP INDIAN EQUITY MID-/SMALL-CAP
India Fund Sector – Infrastructure 15 1
India Fund Flexicap 43 22
India Fund Moderate Allocation 3 1
India Fund Small-/Mid-Cap 3
No Category Available in Morningstar 4

Source: S&P Dow Jones Indices LLC and Morningstar.  Figures based on SPIVA India Mid-Year 2017 Scorecard.  Table is provided for illustrative purposes.

[1]   http://advisor.morningstar.com/Enterprise/VTC/CategoryDefinitions_India_April_2016.pdf

[2]   Please refer the SPIVA India Mid-Year 2017 Scorecard for current and historical mapping of SPIVA and Morningstar categories.

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