Bulls run the high five

Bulls run the high five; MFs rake it in

MF Manager Bloc Hits Higher Returns Than Bulge-Bracket FIIs

THE coming week has special significance for cricket buffs and marketmen. While it marks the beginning of the muchawaited India Premier League cricket series, the week will also witness the completion of five years of a bull run on Indian stock exchanges.
    In April 2003, the Sensex crept to below-3,000 levels (hitting rockbottom) as Infosys halved its earnings' growth guidance. The backlash from the US due to a loss of jobs had raised concerns about the future of its IT business. While Infosys' and analysts fears proved to be unfounded, that was the year the great Indian bull run began.
    It all began, according to experts, around the third week of April 2003 — when the Sensex hovered around sub-3,000 levels. Since then, the Indian equity market (benchmarked on the Sensex) has multiplied five times in just five years , placing it in the league of the world's best performing equity markets. Only four other countries — Russia, Brazil, Indonesia and Mexico — have managed to achieve this.
    While the near-25% correction since the beginning of this year raises questions on sustained buoyancy of Indian shares, ET spreads the logsheets to find answer to the mother of all questions — who made more money in this bull run?
    Mutual fund managers as a community — and not bulge-bracket FIIs — achieved higher returns. While FIIs collectively notched up an annualised return of 30% over the five-year period, it was at 34% for MFs. In arriving at this, the cumulative investment by FIIs has been considered, along with the returns generated by the MF community. For the study, portfolios of FIIs and MFs were analysed along with their net investment figures (Sebi data) over the five-year period to calculate internal rate of returns (IRR). Mid-cap picks helped mutual funds stay ahead in the race
    "INVESTMENT strategy-wise, mutual funds adopt a bottom-up approach. Most funds, over the past few years, have been able to spot potential winners in the mid-cap and small-cap segments and invest in them," said Birla Sun Life Mutual Fund's CIO A Balasubramanian.
    In the initial years of the bull run, mid-cap indices outperformed largecap indices by a huge margin. So to that extent, outperforming the benchmark was an easy game as outperformance meant higher exposure to mid-caps. For instance, in FY04, S&P CNX Mid-cap gave a return of 140% while Nifty (large-cap index) gave only 80%. In the subsequent year (FY05), CNX Mid-cap gave a return of 31% and Nifty 12%. In contrast, FIIs, who religiously stick to large-caps ($1 billion or above), could not benefit from the sharp mid-cap rally. "Frankly speaking, most of the action for institutional investors has been in the large-cap stocks. And with regard to FIIs, most of them hold their portfolios in wellresearched large-cap stocks," said JPMorgan CEO Krishnamurthy Vijayan. However, since 2007, trends reversed in favour of large-caps catching many fund managers on the wrong foot. And if the recent trend of mid-caps underperforming large-caps were to continue, then the equation would change in favour of FIIs.
    While the returns have been in favour of MFs, the money invested by MFs was less than that invested by FIIs during the considered period. FIIs, for instance, invested Rs 2,09,213 crore in the stock market on a net basis over the 5-year period as compared to Rs 38,964 crore by MFs. FIIs' portfolio for listed stocks — as per CMIE data — grew from Rs 54,670 crore to Rs 6,95,123 crore. For MFs, the portfolio grew from Rs 23,085 crore as on March 2003 to Rs 1,69,022 crore as on March 2008.
    Making money in this bull run was not a cakewalk for investors. Over 50% of listed stocks gave lesser returns than the Sensex during the considered period. So, if the Sensex returns were raised as benchmark, there was actually a 50% probability of picking up an underperformer. At the same time, it is interesting to note that more than 80% of equity funds (weighted by assets) managed to outperform the Sensex in terms of returns.