Should Some Dynamic Equity Funds Be Renamed As 'Erratic Equity Funds'? Know Here... - Outside View by PersonalFN

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Should Some Dynamic Equity Funds Be Renamed As 'Erratic Equity Funds'? Know Here...
Mar 26, 2018

Do you remember Ms Dipa Karmakar? She was the first Indian gymnast to qualify for the final round of the women's vault competition at the Rio Olympic Games 2016.

Many admire her for attempting the 'Produnova', a manoeuvre as incredibly complicated as it sounds.

Ms Karmakar lost out on a medal, but she won the hearts of a nation with her vaulting performance. Her name is etched in history as the first Indian gymnast to qualify for the Olympics in 52 years, as she attained 4th position in Women's Vault Gymnastics.

At gymnastic competitions, you will often see athletes do flips, jumps, and tricks that inspire awe. Their superhuman ability to defy gravity isn't the only thing we can't help but admire.

To attain such flexibility takes years of training and practice.

Flexibility in investing

Imagine the same flexibility when investing - the ability to move in and out of equity investments in an effort to deal with market volatility and generating superior returns.

Theoretically, if mutual fund managers can even coarsely time the market, they could achieve a substantial alpha.

To try to achieve market timing, one could employ numerous market-timing strategies, which in the simplest form could be based on long-term valuations using price-to-earnings (P/E) or momentum using moving averages or even something more complex, like the Fed Model, that compares earning yield with interest rates.

Given the short history of the Indian market, that spans only a few decades, it is difficult to test the robustness of such strategies.

Nonetheless, based on these concepts, mutual fund houses offer investors Dynamic Equity Funds. These funds lure investors though their flexibility to move in and out of stocks in an effort to beat the market and other peers.

But, it is easier said than done.

Does this formula driven approach help fund managers to position themselves for the next equity rally or even a crash, just as gymnasts strive to achieve the perfect landing every single time?

Sadly, most such schemes disappoint.

Dynamic Equity Funds: A Performance Review

On checking the performance of Dynamic Equity Funds over multiple market cycles, most schemes adopt a conservative approach and are successful in restricting losses. However, in a bull market, they fail to outperform a broad market index - the S&P BSE 200.

In some bull market periods, even balanced funds are able to put up a better performance than some Dynamic Equity Funds.

Performance Across Market Cycles
Scheme Name 20/Dec/11 To 03/Mar/15 (%) 03/Mar/15 To 25/Feb/16 (%) 25/Feb/16 To 23/Jan/18 (%) 23/Jan/18 To 23/Mar/18 (%)
L&T Dynamic Equity Fund 30.16 -13.19 12.62 -1.94
ICICI Prudential Dynamic Plan 28.74 -19.45 32.23 -7.59
Invesco India Dynamic Equity Fund 26.66 -16.31 25.69 -6.11
Principal Smart Equity Fund 23.17 -8.83 14.51 -2.84
HSBC Dynamic Asset Allocation Fund 17.86 -16.29 25.85 -10.05
Franklin India Dynamic PE Ratio FOFs 16.99 -5.89 16.79 -3.08
Benchmark
S&P BSE 200 24.96 -21.08 30.38 -10.42
CRISIL Hybrid 35+65 - Aggressive Index 20.65 -11.46 23.87 -6.65
Data as on March 23, 2018
For periods less than 1 year, returns are absolute, For periods, greater than 1-year, returns are compounded annualised
(Source: ACE MF, PersonalFN Research)

Did the flexibility help?

In our analysis, the Dynamic Equity Funds that did relatively better than others did not vary their equity exposure very dramatically.

In other words, schemes that attempted a 'Produnova' ended up losing their balance.

Take for example, the Principal Smart Equity Fund. Over the past three years, the equity allocation ranged from a low of around 20% to a high of 80%. Within the past year alone, the equity exposure moved in a wide range of 20%-70%. In August and September 2018, the equity allocation dropped to 20% from 64% in July 2018, before rising back up to 68% in October 2017.

Another example of such volatile equity allocation is a relatively new scheme - SBI Dynamic Asset Allocation Fund. In the past 12 months, the equity allocation peaked at 94% in December 2017, before dropping drastically to merely 6.5% in February 2018. Such volatile movement was seen over 2015-16 as well.

In terms of performance, the returns of the schemes worked out to be more conservative than their aggressive peers. Though these schemes were better equipped to hold their ground when the market declined, it did not significantly boost their long-term performance.

Hence, an aggressive investor seeking long-term market beating returns, would have been utterly disappointed.

Point-to-point returns over time frames
Scheme Name 3 Years (%) 5 Years (%) 7 Years (%)
ICICI Prudential Dynamic Plan 9.79 17.89 13.25
Invesco India Dynamic Equity Fund 7.51 15.40 12.42
L&T Dynamic Equity Fund 3.74 15.12 12.32
Franklin India Dynamic PE Ratio FOFs 7.63 11.56 9.86
Principal Smart Equity Fund 5.63 12.79 10.49
HSBC Dynamic Asset Allocation Fund 6.83 11.65 7.79
HDFC Dynamic PE Ratio FOF 8.06 9.57
DSPBR Dynamic Asset Allocation Fund 7.08
IDFC Dynamic Equity Fund 5.12
Benchmark
CRISIL Hybrid 35+65 - Aggressive Index 8.68 13.36 10.75
S&P BSE 200 7.26 14.07 9.95
Data as on March 23, 2018
Returns are compounded annualised
(Source: ACE MF, PersonalFN Research)

Among the Dynamic Equity Funds that topped the list have not been very dynamic or flexible in the true sense. The ICICI Prudential Dynamic Plan often keeps the equity allocation at above 70%. Only lately, over the past few months, the equity exposure has marginally dropped under 70%.

Similarly, Invesco India Dynamic Equity Fund has adopted a similar strategy like the ICICI Mutual Fund, keep the equity allocation above 70%. In fact, over the past 36 months, the equity allocation has moved in a narrow range of 70%-85%. Its average allocation to equity over this period is just under 80%.

Other schemes too, like L&T Dynamic Equity Fund, do not let their equity allocation fall below 65%, and have maintained an average equity exposure of around 70%.

As you can see in the table above, the schemes that have done well, were able to do so by not being very dynamic.

Should you consider dynamic equity funds?

Dynamic equity funds are an alternative to route your investments in equity funds during volatile market conditions. Hence, you need to pick a scheme that has a dependable track record and process driven investment approach.

That said, most dynamic funds are avoidable. Adopting a systematic approach to investing will better equip you to deal with market volatility.

Hence, it would be better to invest through a Systematic Investment Plan (SIP) in equity-diversified schemes that have an established record of performance.

Editor's Note:

Here is another way to deal with market volatility. Subscribe to PersonalFN's Strategic Portfolio for 2025. This portfolio is based on the core-and-satellite approach to investing. This approach provides 6 key benefits:

  1. Facilitates optimal diversification;
  2. Reduces the risk to your portfolio;
  3. Enables you to benefit from a variety of investment strategies;
  4. Aims to create wealth cushioning the downside;
  5. Offers the potential to outperform the market; and
  6. Reduces the need for constant churning of your entire portfolio.

'Core and satellite' investing is a time-tested strategic way to structure and/or restructure your investment portfolio.

Constructing a portfolio with a stable core of long-term investments and a periphery of more specialist or shorter-term holdings can deliver the benefits of asset allocation and offer the potential to outperform the market. The satellite portfolio provides the opportunity to support the core by taking active calls determined by extensive mutual fund research.

PersonalFN's Strategic Portfolio for 2025, is based on the secret followed by Successful Investors. Subscribe now!

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

Disclaimer:

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.

Equitymaster requests your view! Post a comment on "Should Some Dynamic Equity Funds Be Renamed As 'Erratic Equity Funds'? Know Here...". Click here!

  

More Views on News

Best Banking & PSU Debt Funds to Invest in 2021 (Outside View)

Apr 13, 2021

PersonalFN explains the outlook for Banking & PSU Debt funds and the best Banking & PSU Debt funds that can be considered for investment in 2021.

India: Recovery Stalled by Vaccine Games? (The Honest Truth)

Apr 13, 2021

Ajit Dayal on how India's vaccine strategy will impact the markets.

Why Did the Market Crash on Monday? (Fast Profits Daily)

Apr 13, 2021

In this video, I'll you what I think is the real reason behind yesterday's market crash.

The Next Set of Smallcap Winners (Profit Hunter)

Apr 13, 2021

Price is the only due diligence one might require to buy this business.

Should Mutual Fund Investors Worry About Partial Lockdown? (Outside View)

Apr 12, 2021

PersonalFN explains whether the second wave of COVID-19 infections impact your mutual fund investments.

More Views on News

Most Popular

4 Stocks to Make Your Portfolio Immune to the Second Covid Wave (Profit Hunter)

Apr 6, 2021

Rather than predicting the market, successful investing is more about preparing well and placing your bets accordingly.

If the Market Falls, I Will Do This... (Fast Profits Daily)

Apr 1, 2021

What should you do if the market falls? In this video, I'll tell you what I will do.

The Indian Real Estate Party Has Just Begun (Profit Hunter)

Apr 1, 2021

A favourable demand supply scenario makes a strong case for real estate prices.

The Dilemma of Investing in Bharti Airtel Views On News (Views On News)

Apr 1, 2021

Rahul Shah on whether Bharti Airtel will emerge as the next big thing in the Indian stock market

India: Recovery Stalled by Vaccine Games? (The Honest Truth)

Apr 13, 2021

Ajit Dayal on how India's vaccine strategy will impact the markets.

More

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Apr 13, 2021 (Close)

MARKET STATS