A Closer Look at India SPIVA Year-End 2014

The debate on the merits of active versus passive fund management can be a contentious topic and most recently was so for S&P DJI’s most recent SPIVA India Scorecard.  To that end, it might be helpful to review some of the provisions of the CFA Institute’s 2010 edition of the Global Investment Performance Standards (GIPS) regarding calculation methodology and composite construction, including the following.

  • Calculation methodology
    • A.1: Total returns must be used.
    • A.6: Composite returns must be calculated by asset-weighting the individual portfolio returns using beginning-of-period values or a method that reflects both beginning-of-period values and external cash flows.
  • Composite construction
    • A.6: Terminated portfolios must be included in the historical performance of the composite up to the last full measurement period that each portfolio was under management.

For the India SPIVA report, we use total returns for comparison purposes, since these include income from dividends, and we include merged or liquidated funds. We choose the benchmark indices to be representative of the segment in which each fund invests. We also take the oldest share class per fund to avoid double counting.

To compute survivorship, we calculate the number of funds that were either merged or liquidated during the evaluation period. For example, for the five-year period ending December 2014, we found that the survivorship rate was 80.30% for the Indian large-cap actively managed mutual funds. What this means is that out of the total available funds, which were 102 at the beginning of the period, 20 funds were either merged or liquidated during the five-year period.

To compute outperformance, we compare each individual fund’s returns with those of the relevant benchmark, after removing those funds for which data is not available. We use the total returns of the benchmark for comparison purposes. For example, for the five-year period ending December 2014, we found that 52.94% of the Indian Equity Large-Cap actively managed mutual funds could not keep up with the S&P BSE 100. What this means is that out of the total available funds, which were 102 at the beginning of the period, 54 funds underperformed the S&P BSE 100. The returns of each individual fund were compared with those of the S&P BSE 100 to arrive at this statistic. This has nothing to do with equal-weighted or asset-weighted returns. These 54 funds also include the 20 funds that were either merged or liquidated because excluding them would inflate the perception of success.

In addition, we calculate equal-weighted fund returns based on the monthly returns of each fund. We did not include the asset-weighted returns, given there is limited data available to calculate asset-weighted returns since only the quarterly average of the assets under management is available for evaluation from the Association of Mutual Funds of India.

Nevertheless, let’s look at asset-weighted returns based on the quarterly average assets under management (see Exhibit 1). In this case, the share class with the highest quarterly average assets under management at the beginning of the period was identified for each fund and then the asset-weighted returns were calculated.

Exhibit 1: Asset-Weighted Fund Returns
S&P Index with Respective Peer Group One-Year (%) Three-Year Annualized (%) Five-Year Annualized (%)
S&P BSE 100 34.19 24.04 10.97
Indian Equity Large-Cap 45.50 25.57 12.53
S&P BSE 200 37.44 24.76 11.10
Indian ELSS 51.86 29.42 14.05
S&P BSE MidCap 48.63 31.72 12.91
Indian Equity Mid-/Small-Cap 72.35 36.51 17.24
S&P BSE India Government Bond Index 15.72 10.05 8.50
Indian Government Bond 16.10 9.46 7.42
S&P BSE India Bond Index 15.42 10.14 8.62
Indian Composite Bond 12.44 9.07 7.84

Source: S&P Dow Jones Indices LLC, Morningstar, Association of Mutual Funds of India.  Data as of Dec. 31, 2014.  All returns in INR.  Past performance is no guarantee of future results.  Table is provided for illustrative purposes. 

We can observe that the five-year asset-weighted returns for the actively managed Indian Government Bond funds and the Indian Composite Bond funds are less than their respective benchmarks, the S&P BSE India Government Bond Index and the S&P BSE India Bond Index. In the case of the actively managed equity mutual funds, all the fund categories have higher five-year asset-weighted returns than their respective benchmarks. The equal-weighted returns presented in the India SPIVA Year-End 2014 report told the same story, except for the Indian Equity Large-Cap funds.

We can observe that the asset-weighted returns for the actively managed Indian Equity Large-Cap funds were almost 1.56% more than S&P BSE 100, indicating that the larger funds led the rally. Let’s break down the statistics of this fund category into quartiles by the asset size (Exhibit 2). The calculation used the share class with the highest quarterly average assets under management at the beginning of the five-year period for each fund for which the average asset under management was available.

Exhibit 2: Indian Equity Large-Cap Funds Over a Five-Year Period
Quartile Percentage Outperformed by S&P BSE 100 (%) Survivorship (%) Equal-Weighted Returns Five-Year Annualized (%) Asset-Weighted Returns Five-Year Annualized (%)
1 40.00 88.00 11.81 12.70
2 32.00 92.00 12.25 12.58
3 80.00 60.00 10.41 11.34
4 79.17 62.50 10.17 10.49

Source: S&P Dow Jones Indices LLC, Morningstar, Association of Mutual Funds of India.  Data as of Dec. 31, 2014.  All returns in INR.  Past performance is no guarantee of future results.  Table is provided for illustrative purposes. 

We can notice that, even in the first and second quartile, which consists of the largest funds by asset size, the S&P BSE 100 outperformed 40% and 32% of the funds over the five-year period ending December 2014. Over the same period, within the third and fourth quartile, the majority of the funds were outperformed by their respective benchmark. The equal-weighted asset returns of the first quartile were less than the second quartile by 44 bps whereas the asset-weighted returns of the first quartile were more than the second quartile by only 12 bps over the same five-year period. Even the survivorship percentage of the second quartile was better than the first quartile.

Therefore, it is evident that not all the funds outperformed the benchmark on the basis of having the largest asset size

The posts on this blog are opinions, not advice. Please read our disclaimers.

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