Mutual Fund Performance Review & Strategy Insights – August 2018

August turned out to be a bullish month for the equity markets, and a bearish month for the debt markets. The bellwether NIFTY index continued its steady ascent rising by 3.11%. and the NIFTY Midcap 50 surged by 6.55%. Bond yields rose 3.14% in the month, resulting in mark to market losses for debt fund portfolios. With yields having surged over 150 basis points in the past year and a half, we are now in one of the worst bear markets that the debt markets have witnessed in recent times.

Equity Funds

The Pharma sector clearly outshone all others this month, giving a massive fillip to the beleaguered bunch of Pharma focused funds. In the past 14 trading sessions, the Pharma index has run up by over 15%. Its not surprising, then, that 4 of the top 5 performing funds in August were Pharma or Healthcare focused funds, with SBI Healthcare Opportunities Fund (erstwhile SBI Pharma Fund) ruling the roost, delivering a 10.04% return on a 1-month basis. SBI Healthcare Opportunities Fund maintains a relatively concentrated portfolio, with just 25 stocks and a 42% allocation to mid-caps. IIFL Focused Equity Fund, a relatively small fund with a 246 Crore AUM, came in at a surprising second place. The fund maintains an 11% allocation to the Healthcare sector, compared to the 3% category average for Multi Cap Funds.

Debt Funds

The bearish trends in the debt markets continued unabated, with the chief headwinds being concerns over fiscal slippage and the INR breaching the $70 mark. If the reserve bank starts selling bonds to stabilize the currency, bond yields may rise further and lead to more pain for fixed income investors – the market is clearly factoring in such an event. It’s not surprising, then, that long term debt funds fared nowhere in the top performers. The recently launched NFO, Reliance Nivesh Lakshya Fund, took a big hit – with its NAV falling 1.15% in the past month. The aforementioned fund holds long-dated G-Secs until maturity; therefore, it carries a significant degree of interest rate risk. Dynamic Bond funds continued their recent run of poor performance, raising questions on the ability of many fund managers to correctly predict yield movements. Worth noting is the consistent recent outperformance by the fixed income desk of Franklin Templeton Mutual Fund, with 3 of the top 5 performing debt funds over the past month being from their stable. Even over a 3-month time frame, 5 of the top 6 performers in terms of returns, are from Franklin Templeton.

Hybrid Funds

Hybrid Funds were a mixed bag last month, with the top 5 performers clocking an average return of 3.02%, and the bottom 5 delivering an average negative return of 0.5%. Not surprisingly, it is the debt-oriented hybrids that struggled the most, with yields surging more than 3% in the month. In the coming months, Fund Managers will in the hybrid space are bound to face multiple challenges, both in terms of deciding their asset allocation between equity and debt, and in terms of managing the YTM’s and durations of the debt portions of their portfolios. Performance-wise, ICICI Prudential & LIC Mutual Fund were the clear winners in the hybrid space last month, with 2 of the top 5 performers coming from their respective stables. ICICI Prudential’s Multi Asset Fund, which used to be known as “Dynamic Plan” earlier, delivered an impressive return of 2.86% in the month.

Mutual Fund Strategy Insights

Impressive GDP growth numbers notwithstanding, there’s a dangerous cocktail of overvaluation brewing within the equity markets. With corporate earnings growth showing signs of recovery but still muted, the rupee taking a tumble, and the global trade wars continuing unabated, the 28X+ earnings multiple that the NIFTY is currently commanding, is questionable – at least in the short to medium term. On the debt side, there seems to be no real reason why yields will trend down in the short term. This appears to be a good time to take profits in equity funds and move some of your portfolio to short-term debt funds. Better yet, start a 2-year STP from the debt funds back into a multi-cap fund right away. While it’s a good time to be risk-off, it’s important to make sure you structurally build back your allocation to equities (if you’re a long-term investor), and this strategy will help you do so. What’s more, this may be the last time you do this in a relatively tax-efficient manner, as grandfathering won’t last forever!