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<\/p>\nOver 87 per cent of active large-cap schemes failed to outperform the benchmark S&P BSE 100 (total return) in the 2022 calendar year (CY), significantly higher than the 2021 figure of 50 per cent, shows a report by S&P Dow Jones Indices.<\/p>\n
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During the three-year period (CY 2020, ’21, ’22), the percentage of schemes underperforming the index was even higher at 97 per cent.<\/p>\n
While active large-cap schemes generally find it tough to outperform due to a rising efficiency in the market, 2022 proved to be even more challenging as mid-cap and small-cap stocks (where they have some allocation) performed poorly vis-a-vis the large-caps.<\/p>\n
In 2022, the S&P BSE 100 TRI rose 6 per cent, while the small-cap index S&P BSE 250 Smallcap TRI ended the year one per cent lower.<\/p>\n
The S&P BSE 150 Midcap TRI went up just 3.6 per cent. In 2021, the small-cap index was up 59 per cent, while the large-cap index rose just 26 per cent.<\/p>\n
The returns of active schemes also suffered due to them being underweight on Adani Group stocks, which were top performers in the large-cap indices in 2022.<\/p>\n
The S&P BSE 100 has five Adani Group companies in Adani Ports and Special Economic Zone, Adani Enterprises, Adani Transmission, Adani Green, and Adani Total Gas.<\/p>\n
Two of these companies — Adani Power and Adani Enterprises — delivered over 150 per cent returns last year.<\/p>\n
“In 2022, most returns came from select stocks — and Adani Group shares were among them.<\/p>\n
“The high dispersion in returns tends to negatively impact diversified active funds.<\/p>\n
“Also, active large-cap funds can invest up to 20 per cent in mid-cap and small-cap stocks.<\/p>\n
“This allocation creates a drag on returns when mid-cap and small-cap stocks underperform large-caps.<\/p>\n
“Lastly, the higher expense ratio of active funds also weighs on returns,” says Vishal Dhawan, founder and chief executive officer, Plan Ahead Wealth Advisors.<\/p>\n
Arun Kumar, vice president and head of research at FundsIndia, cites the active funds’ overlap with the index and a higher expense ratio as the reasons for their continued underperformance.<\/p>\n
“Higher expense ratios for active funds and high overlap with the benchmark index (average for large-cap category around 60 per cent) has made it extremely difficult for active large-cap funds to consistently outperform their passive peers,” he said.<\/p>\n
“To put that into context, at the existing overlap of around 60 per cent, to stay on par with index returns, a large cap fund manager must provide an outperformance of around 2.5 per cent every year on the differentiated portion (around 40 per cent) to account for a 1 per cent difference in expense ratio,” Kumar added.<\/p>\n
Other than these factors, market observers say the large-cap space is where the interest of large institutional players, including foreign portfolio investors, is concentrated.<\/p>\n
As a result, there is little information asymmetry or the possibility of making outsized gains.<\/p>\n