FUND SIZE MATTERS! - REALLY?
Author: Dr. Renu Pothen, Research Head, Fundsupermart.com India
This article was published in Moneycontrol.com on Tuesday, 21 August 2012
The assets under management (AUM) of HDFC Top 200 Fund and HDFC Equity Fund, considered to be the favorites among mutual fund investors crossed INR 11,000 crore and INR 9000 crore respectively for the first time last year. Since then, we have been bombarded with media articles and expert talks on the advantages and disadvantages of investing in funds with a large/small AUM. From an investment perspective, a fund with a small AUM can mean anything in the range of INR100 crore and below. This could actually vary between Financial Advisors and investors themselves.
A closer look at the AUM of 361 equity funds in the mutual fund industry as on June 2012 showed that there are around 170 funds which have an AUM of less than INR 100 crore. Around 68% of these 170 funds had an AUM of less than INR 50 crore, some of which have been in existence for more than 10 years. Another interesting observation that came out was that there are around 11 funds which had an AUM of more than INR 3000 crore and together they constituted more than 30% of the total AUM of the equity funds category.
I have always been of the view that investors should be more concerned with the performance parameters and investment strategies of a fund rather than focusing on the AUM of the funds. In line with this stand, when we released our recommended funds list for 2012, out of 29 equity funds, 24% had an AUM of less than INR 100 crore. We recommend funds on the basis of a methodology which includes several parameters like fund performance, expense ratio, ability of the funds to withstand the downtrend in markets, investment strategy during bullish and bearish phases etc along with other qualitative factors.
To make this point clearer, let me put some numbers into perspective. In the infrastructure space there are around 21 funds in the industry, out of which 9 funds have an AUM of less than INR 100 crore. A detailed analysis of these funds threw up AIG Infrastructure and Economic Reform Fund, managed by Huzaifa Husain, as the best performer in this category. This fund was able to beat the bigger names in the infrastructure space by clearing all the filters in our model. In addition to this, a closer look at the fund manager’s investment strategy shows that he sticks to his theme of investing only in stocks in the infrastructure space.
The expertise that Husain has exhibited in managing this fund since he took over in 2009, gave us the confidence of going ahead and recommending the same to our investors. AIG Infrastructure and Economic Reform Fund with a corpus of INR 87 crore as on June 2012, is competing with some of the Goliaths in this space. Although, many of them are managing infrastructure funds, they surprisingly have more than 20% exposure in the banking space.
Another surprise brought to light by the model was in the contra space, when Religare Contra Fund managed by the seasoned fund manager Vetri Subramaniam with an AUM of INR 63 core (as on June 2012) managed to beat the biggest peer in its category, i.e. SBI Magnum Sector Funds Umbrella- Contra Fund. An analysis of the portfolio strategy over the years showed that Subramaniam has been sticking to the mandate of the fund by actually taking contrarian calls as far as his stock selection and sectoral bets are concerned. There are numerous funds in the industry having a small AUM that have outperformed its peers.
Another example to show that investors shouldn’t lose sleep over funds with lesser AUM is the case of ICICI Prudential Focused Bluechip Equity Fund from the largecap category. This fund from the ICICI Fund house grew from a small base of INR 530 crore in June 2008 to INR 3841 crore by June 2012. This means that within a short span of 4 years, the AUM of this fund grew by around 625% vis-a-vis some of its peers in the same category which took more than 15 years to achieve this level. This fund has not only grown in size but has also beaten some of the veterans in the space by its consistent performance since its inception.
To conclude, when investors want to add equity funds to their portfolio, they should judge them on the basis of quantitiave and qualitative factors and not look at size alone. Instead of opting only for the stalwarts of the industry, investors should hold on to their nerves and invest in some of the top performing, but relatively small funds as well. Finally, investors should remember that today’s Goliaths were yesterday’s Davids, whom investors entrusted their money with, thus enabling them to achieve this status.