What a year it has been for all of us! For you, it would have been a feast to see your portfolio magically turnaround or zoom, if it had looked lacklustre earlier.
As for us, at research, it may be logical to think that it is not too difficult to pick funds in this market. But believe me – it is tough to resist the temptation to pick funds merely because they are chart busters. In other words, it was a tough call on what not to pick, especially when we know such funds attract ‘universal’ attention.
Overall, it was a dicey year; a year that required us to constantly internalise our house view – that consistency matters over flash-of-the-pan returns. So, while we knew the absence of chart toppers may drag our fund list’s near-term returns, we also knew we would not have to worry about it in the long term.
In this round up, we have considered only two major categories of funds – all equity funds and our long-term debt funds. This is because the other categories serve limited purposes. Since we review these funds every quarter, we have adjusted the returns chart for changes made during our review. We have considered the point-to-point returns for this purpose (up to December 30, 2014). The returns mentioned for the funds are average returns for that category.
So let me begin with the caveat – a one-year performance would not tell you whether our calls were good enough, nor will it let you know where we lack. You may view this as a disclosure exercise as we like to keep you informed at all points, and the end of the year is a good juncture to take a re-look.
Our equity funds included large and diversified funds, mid-cap funds, as well as tax-saving funds. As an asset class, they delivered 45 per cent on an average, beating the Sensex return of 28 per cent, and a broader index, i.e., BSE 500’s return of 31.4 per cent. The outperformance, by itself, was comfortable. However, the averages could have been much higher, but for some delay in a few decisions.
For instance, while we knew dividend yield, as an idea, was underperforming, we chose to keep some of those funds in our select list and did not remove it, at least until the first half of the year. This did cost us a bit. Even now, we believe these funds are a ‘hold’ and there is no reason to throw them out of any portfolio.
Similarly, we delayed a bit in introducing funds that were a little more than large-caps, but still did not go much into mid-cap territory (like the Top 100 funds). As opportunities in large caps faded a bit in the early part of the year, we could have introduced this category of funds sooner to help move into funds that invested beyond blue chip stocks.
What we could pride on were some of the early calls in the aggressive/mid-cap category. We, in fact, came up with a call in early March, ahead of the elections, with a 3-fund equity portfolio for the election euphoria and beyond. Funds such as HDFC Top 200, Franklin India Prima and ICICI Pru Value Discovery, which were all tilted towards cyclical sectors, were part of that call and worked well for those who took exposure early on.
If you break our Select List performance into large and diversified funds on one hand, and mid-cap/aggressive funds on the other, the performance chart looks like this (see table below). Clearly, our aggressive calls worked quite well (considering that the BSE Midcap is extremely hard to beat) and that is not surprising in a market such as the one in 2014.
To be honest, we have preferred to err on the side of caution when it came to debt calls. The interest rate uncertainty did not make things easier; but then we decided to be bolder than we usually are.
In general, when it comes to long-term debt funds, we prefer moderate credit risk, and shun taking long duration calls. This is why you will not find pure gilt funds in our list. However, rate cuts or not, with yields easing off their highs, it is tough not to participate in the duration game, albeit limiting the risk to some extent.
We did this, but only in the later part of the year. As a result, while we comfortably managed double digit returns, our funds lagged the Crisil Composite Bond Fund (which has long-term gilts) Index marginally. We did, however, manage to beat the index that is the benchmark for many of the funds in our list – Crisil Short Term Bond Index (10 per cent).
However, we have decided to add a bit more of duration calls in our latest review, and you will see some aggressively positioned funds too. Also, we believe the changes we made in the second half of 2014 will start demonstrating better results in another quarter or so.
You can click here to see our Select Funds list.
What’s in it for you
If you are going to ask whether you should shuffle your portfolio based on the changes in our Select list, the answer is ‘no’. Your portfolio would have been built with a specific goal, purpose, time frame, or risk profile; and many of the funds we exit are not really ‘sells’. The Select list makes an endeavour to feature good funds at that point in time. Hence, for investors entering afresh, it is a good list to refer. It is not a portfolio by itself.
When we write to you about our quarterly reviews, we make it clear whether a fund that exits our list needs to be exited, or is a ‘hold’. Over and above this, when in doubt, you can always talk to our advisors who use the Select list as a reference point but customise the same to suit your specific need.
My suggestion to you would be to use our portfolio review service (through our advisors) more actively, not just to choose funds, but even to decide when you want to exit something. This way, you will have some assurance on whether you are not making the wrong moves, and you can continue to hold an optimal portfolio.
2015 would be a year where you need to be more discerning about the quality of funds you hold as stock picking would no longer be easy. But we hope to do all we can to ensure you have a smooth ride.
Our latest review of the Select list for the upcoming quarter is complete and we will mail you about the changes in the coming week. Have a prosperous year ahead and happy investing!
Returns mentioned are past returns and are not indicative of future performance.
To know how to read our weekly fund reviews, please click here.