Although many pursue the best -performing funds from last year, Belapurkar warns that only a fraction of them maintains their ranking in the course of time.
He emphasizes the importance of consistency, strong investment processes and disciplined teams about chasing flashy short-term return investors that it is not the rear view mirror in investment funds, but the way there is. Edited fragments –
Kshitij Anand: Let’s start with the basics. What is the golden thumb rule for retail investors? What should they follow when checking whether their investment fund is performing well or not?
Kaustubh Belapurkar: If you just go back to basics, most investors, when you think about it, when they want to invest, there are of course golden rules in terms of following an approach to assets allocation and all.
And assuming that everything, that should be the driving force behind every investment decision to start with.
But if you have decided what the construction of your portfolio should look like and you actually came up to choose the funds within, for example, categories or asset classes, you think you will start thinking about which funds best fit in your portfolio.
Traditionally, and this may sound a bit counter -intuitive, but of course it is useful to look at earlier performance, but our mind should not be the end point of an investment decision.
More often than not, purely what we call rear -view mirror – only choosing funds that have done the recent, three or five years good – can actually be quite harmful to your investment decisions.
We will talk a little more about why that is and how you can avoid it. So that is something to keep in mind: look at the implementation, but don’t make that the holy grail of investing. Saying: “I’m just going to choose the best performing fund in the past one or three years” will be counterproductive.
Kshitij Anand: Many investors consider the past return as the only measure. Should investors stop there, or is there a rule of thumb to go beyond the return while they assess the performance?
Kaustubh Belapurkar: Let me work a bit with some data. We have carried out an analysis in the last five years – and the data would apply, even if we were doing it over the past 10-15 years.
What we have noticed was that if you have been demolished to the monthly streams that have come in money over the past five years and have been demolished by Kwartiel from fund performance in categories and asset classes in the fund, the only thing that stood out: Many investing that happened traditionally, is simply choosing the best fund in the past year on a point-to-point performance bas..
That is because it is the most visible number and excites investors. If you see a fund, hypothetical, 20% versus the category average of 10%, investors tend to think that this may continue forever – that the fund will always surpass. But we know that this is not necessarily the case.
Looking at the data, we saw that Kwartiel one and quartile two funds on the basis of a year of track records in the past five years actually collected about three -quarters of the streams.
But if I just do a simple exercise and look at what the quartile was five years ago and what they are now, only 25% of those Q1 funds Kwartiel one remained in that period. So the persistence of performance can be pretty bad.
Investors must get away from this short term and the point-to-point performance statistics. What brings me to your question: what should they do? There are a few things that investors can do.
One is of course that the options for investors have grown – there have been new launches from the fund and there are many existing funds, so the options grow alone. This makes it confusing, because even if you choose the category, how do you choose, for example, 40 funds?
The first thing investors can do possible is, when we say in the long term, look at risk-corrected rolling efficiency. You can also look at SIP returns, because many investors come through SIPs.
View three to five-year-old SIP returns, which give you an element of consistency in how the fund delivered month after month or for a longer period.
Then, very important, you have to look beyond the return. A very simple thing that an average investor can do is think about the strength of the investment team and the consistency of the investment process.
The return is a factor or the end result of a good team and a good investment process that can be applied repeatedly, which will result in a consistent return. It takes the element away from “Maybe the fund was in the right place at the right time.” Without a good team and a good process, it is unlikely that a fund can consistently yield excellent returns. That is something to keep in mind.
Kshitij Anand: So, the management family tree is also something that investors have to write down.
Kaustubh Belapurkar: Yes.
Kshitij Anand: And, well, markets move in Cycli, just like efficiency. If we talk about consistency versus short -term performance or outperformance, how much weight should investors really have to give consistency? Is there a thumb rule to balance the two?
Kaustubh Belapurkar: Absolute. I would say that Focus is purely on consistency instead of looking at outperformance in the short term. Let me work again with an example.
We did a study to look at the last 10 years of monthly return time series of funds versus their benchmarks. In essence, we looked at funds that had surpassed their benchmarks.
We already know that it is becoming more difficult to beat benchmarks, so you are already looking at a smaller subset of funds who have defeated their benchmarks in, for example, 10 years.
What we have observed was that certain good months of performance can contribute to the entire outperformance of a fund versus the benchmark.
The data showed us that on average only five months of the last 10 years – five of the 120 months, or only about 4-4.5% of the total period – took into account the entire outperformance of the fund versus the benchmark.
That will be very important: if you were not investing in that fund during those four or five months, you would not have defeated the benchmark. The old saying “time the market not time; time in the market is more important than the timing of the market” has been proven here.
This is why consistency becomes so important. Some of the best managed funds will continue to deliver a steady outperformance, instead of having great months at the same time and bad months with someone else, which would give investors a very different experience than a more consistently managed fund.
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