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The Tortoise and the Hare - Story of the Year 2015 - Outside View by PersonalFN

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The Tortoise and the Hare - Story of the Year 2015
Jan 1, 2016

Many believe fairy tales, story books, and cartoon channels are only for children; but this is untrue. Animation cartoons can be entertaining for all ages (Madagascar anyone?). Fables and stories are not only entertaining, but have life lessons and moral messages for us. For instance, the story of the Tortoise and the Hare teaches us important lessons. Many generations have grown up reading this story or watching the video. The rabbit in the story ridicules the tortoise when he learns of the turtle's challenge to race. We all know what happens thereafter, don't we? But unfortunately, many of us, especially the investors, have forgotten the moral of the story.

In the first month of 2015; S&P BSE Sensex rose by a little over 6.0% and gold yielded about 3.77% returns. On the other hand, Crisil Composite Bond Fund Index generated 1.74%, while Crisil Short Term Bond Fund Index jumped 0.92%.

As we cross over from 2015, the situation seems to have reversed. Those investors who followed the market momentum and betted on equities or gold were at the dawn, having played 'rabbits' in the market this year. The tortoises are those who staked their money on debt towards the beginning of 2015.

Tortoises have outperformed rabbits in 2015

As you can see in the graph above, the year 2015 belonged to fixed income assets. Despite starting on a lighter note, the benchmarks for debt funds have outperformed various assets classes such as equity, crude oil, Rupee and Gold too.

Why did debt funds outperform equity and other asset classes?

  • Inflation remained within the comfort zone of RBI
  • RBI cut policy rates aggressively throughout 2015
  • Despite of falling exports, India's current account position has remained stable
  • Fall in crude and other commodities has helped India save valuable foreign exchange
  • Tight forex management by RBI didn't allow Rupee to appreciate or depreciate in an unpredictable and dangerous manner
  • Foreign Institutional Investors (FIIs) invested heavily in Indian debt

Commodities slumped

As the economic-financial world expected the Federal Reserve (Fed) in the U.S. to hike interest rates in 2015, the U.S. $ enjoyed a good run. Greenback appreciated against the basket of currencies and all assets valued in U.S.$ depreciated. About 7 years ago, gold had begun its upward journey when the Fed decided to slash rates to support the sliding economic conditions. Now that the economy is stabilising the Fed has started walking the path of normalization of policy rates. This has made gold less attractive. Excess supply and overall economic lull across the globe kept crude under tremendous pressure. Organization of the Petroleum Exporting Countries (OPEC) decided not to cut the production. This was aimed at not losing out to American Oil Exporters, which have a high breakeven point.

On the other hand equity underperformed primarily because...

  • Valuations were already stretched at the beginning of the year
  • Corporate earnings didn't show any significant improvement, which drove valuations further up
  • Indian banks continued their struggle to maintain asset quality. Let's not forget that at a macro level, the banks' health affects lending activity. In frontline indices, Indian banks acquire a higher weightage
  • Government didn't perform as expected on the reform agenda with crucial bills such as GST Bill and Land Acquisition Bill stuck in the parliamentary hurdles
  • Global events such as anticipation about Fed's lift off kept Indian markets on the tenterhooks

Within equity, surprisingly mid and small caps outperformed largecaps. The same story is being repeated in case of mutual funds. Mid and Small cap oriented funds have outshone the largecap oriented funds so far in 2015.

Category Average Returns (absolute %)
Mid and Small Cap Oriented Funds 7.1
Multi Flexi Opportunities Funds 1.3
Large Cap Funds -0.7

Data as on December 24, 2015
(Source: ACE MF, PersonalFN Research)
#51 largecap oriented funds, 36 mid and smallcap oriented funds and 61 multi-flexi
and opportunities funds have been considered for calculating average returns in the above given table.

Reasons why mid and small cap funds outperformed:

  • Risk appetite among domestic investors was high as a result mid and small caps saw consistent buying interest
  • Companies in the mid and small cap space selectively showed better growth performance than those in largecap space
  • Although the FII flows in equity fell substantially from 96,795 crore in 2014 to 16,674 in 2015; until December 24, 2015, there wasn't any panic selling. This helped mid and small caps maintain the lead over larger companies.

Mutual Fund companies had a good year...

Domestic retail investors are aggressively putting money into equity markets through mutual funds. As per the Business Standard dated December 27, 2015, average daily addition to equity folios has been 11,000 in 2015. Quantum of inflows in equity schemes of all mutual funds put together has been Rs 90,000 crore in 2015-a decade high.

Have retail investors repeated their mistake?

In the past, retail investors have lost money due to their tendencies to follow the market momentum. They often come to markets at the advanced stage of a strong rally and end up buying what FIIs dump, which makes these the first movers in the markets. FIIs buy on speculative hopes and are agile enough to book profits or cut losses, however retail investors fall in the trap. Mutual funds are equally responsible for this. They always float New Fund Offers (NFOs) when markets are strong. That's the best time to dig into investor's pocket. Looking at numbers, it seems investors have not learned anything from their mistakes.

Here's a message for mutual fund investors:

  • Focus on your goals, rather than the movement of asset prices
  • Always invest as per asset allocation suggested by your financial planner
  • Take time to review and rebalance your portfolio periodically

What can we expect from the road ahead?

Indian markets have been moving horizontally, mainly because of an unfavourable combination of high valuations and poor earning's growth. Lack of reforms has been an Achilles' heel. Smart FIIs have realised this and therefore have been making a silent exit from Indian markets. Retail investors can only hope that their bets pay off (one more time?).

So, take a New Year resolution of being a focused and prudent investor.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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