Over 40 asset management companies (AMCs) operate in India and offer more than 300 equity schemes. Many fund houses have tried to differentiate themselves by offering unique schemes—other than the usual equity diversified large-cap, mid-cap, small-cap and sector schemes. There are contra schemes, dividend yield schemes, balanced schemes and a whole lot of other hybrid schemes that have been launched in the past. Fund houses are launching more of such schemes to lure investors. However, our analysis shows that these schemes do not have a superior investment style and are investing in the same set of prominent stocks as the other mutual fund schemes. In fact, some of these schemes have been merged with other schemes to hide their poor performance. An intriguing category is dynamic schemes.
Dynamic plans free fund managers from the constraints of having to stay fully invested at all times. They can invest the assets of the portfolio fully in equity or fully in debt, according to their market sense. With the flexibility to move in or out of equity on their perception of market movement, these schemes should be among the best performing schemes, if they are well managed. The volatile market of the past two years (ending December 2012) has been a rigorous test of the market-timing abilities of dynamic schemes. We have not taken a longer period for our analysis, as some of these schemes have a short track record.
There are six schemes that are based on this investment strategy. Three of these were launched in the past three years. During the past two years, the Sensex was down. The average quarterly mean return of the index was -0.62%. Large-cap schemes did better than the Sensex; the top 20 schemes returned an average of 0.73%. Did dynamic schemes perform any better? Well, dynamic schemes struggled to deliver an average quarterly return of 0.30%. The CRISIL MIP Blended Fund Index (S&P CNX Nifty Index-15% weight and CRISIL Long Term Debt Index-85% weight) delivered a return of 1.67%.
Like dynamic schemes, balanced schemes also enjoy flexibility, though limited, to allocate 65%-100% of their assets to equity. However, we found that balanced schemes are no different from equity diversified schemes which invest 80%-100% of their portfolio in equities. Therefore, do dynamic schemes actually make use of their flexibility or follow an allocation strategy like any other equity scheme?
Each of the six dynamic schemes analysed has the flexibility to move completely in or completely out of equity. ING Asset Allocator Multi Manager FoF Scheme kept an equity allocation of over 90% at the beginning of the period; now, it is around 70%. The scheme delivered a return of -1.54%. You would have been better off investing in a large-cap equity scheme. Pramerica Dynamic Fund is the only exception, with a minimum limit of 30% for allocation to equity. Having the flexibility to keep its allocation to equity as low as 30% and as high as 100%, the Fund kept a constant allocation of around 70% for equity, over the two-year period. The Fund delivered a return of just 0.10%. HSBC Dynamic Fund is another scheme which hardly altered its equity allocation. Over the past two years, the Fund kept an equity allocation of above 70%. This is no different from any other balanced scheme. In fact, in spite of this, its performance was worse than that of the CRISIL Balanced Fund Index, delivering a return of -0.55%. ICICI Prudential Dynamic Plan too kept its allocation to equity above 65% and was able to marginally beat the CRISIL Balanced Fund Index over the period, with a return of 0.54%.
The remaining two schemes, namely, FT India Dynamic PE Ratio FoF and Principal Smart Equity Fund, reduced their equity allocation to as low as 45% of their portfolio. These two schemes had the highest variations in their equity allocation compared to other schemes, suggesting that they actively went in and out of equity, depending on the market valuation. The two schemes topped the list of dynamic schemes in terms of performance. FT India Dynamic PE Ratio FoF delivered a return of 1.62% and Principal Smart Equity Fund delivered a return of 1.61%. Both these schemes delivered a return that was better than the top performing large-cap scheme which delivered a return of 1.47%.