March 10, 2016

From High to Low

As readers of this blog may be aware, I am a sucker for statistics.  I frequently go digging into historical data.  But it isn’t something that I do for entertainment.  Every now and then, looking into data, I find something that sharpens or enhances my understanding of the nature of risk.  It is with the intention of sharing some of that, that I present below the results of my latest effort, which looks at the returns of some equity schemes over a 16 year period.  In such studies, it is often the case that some schemes end up with far more impressive returns than others- that is but to be expected.  While there may be a case to raise eyebrows and ask questions, I wouldn’t suggest passing judgment on any scheme without further investigation.  As I have maintained in the past, there is more to performance than what returns may convey. As I have also previously mentioned, one should be careful about drawing any inferences from such observations other than on the merits of diversification. 

Almost a month ago, on Feb 11, the BSE Sensex hit a new low, relative to its last high.  It may well fall further but at the time of writing, that has not (yet) happened.  Its closing value on Feb 11, was over 22% below the last closing high on 29 Jan 2015.  As far as I can make out, this was the 11th time since its inception that the Sensex has fallen 20% or more from a previous high.  The first time this happened, it fell just over 20% before rebounding.  On the subsequent nine occasions, the fall to the bottom has ranged from 27% to 61%.  On five of these occasions, the fall was in excess of 40%.

Feb 11 also happened to be the anniversary of an earlier high.  In 2000, the Sensex peaked on this date.  The identical date brought back the memory of something that I had heard many years ago, from a certain advisor.  He had said something to the effect that the acid test of the long-term performance of an equity scheme was the return that it generated from a market peak to a market bottom.  In that light, I thought it might be interesting (even if premature) to check out the returns of equity schemes over these 16 years.  I am aware of the vagueness of the term, “long-term” and the mixed feelings that people have about its use.  But I doubt if anyone would question the validity of a period of 16 years being “long-term.”  Using data from Value Research, ICRA Online and Moneycontrol, I give below some of my observations.  Do note that the scheme returns do not consider loads.

  • Currently, there appear to be 49 actively managed, diversified, domestic equity schemes that were in existence in Feb 2000. 
  • The return on these schemes over these 16 years ranged from 18.7% pa to 5.2% pa.
  • The CAGR of the BSE Sensex Total Return Index (TRI) over this period was 10.6% pa.
  • The return on 14 of these schemes was less than the CAGR of the BSE Sensex TRI. At least 4 of these were once positioned as flagship schemes, so to say, of their respective fund houses. 
  • Amongst schemes that are currently rated with 5-stars by Value Research, the lowest return was 9.7% pa.
  • Amongst schemes that are currently rated with 1-star by Value Research, the highest return was 18.5% pa.
  • The preceding 13 months (i.e. preceding Feb 11 2000) was a period of extraordinary returns for equity schemes.  One scheme, it appears, had delivered a higher absolute return over the preceding 13 months than it did over this entire 16 year period. Its absolute return over the preceding 13 months was 326% while over the entire 16 year period, it was 297%.
  • At least 4 other schemes delivered an absolute return over the preceding 13 months that was over 50% of what they did over this entire 16 year period.
  • At the time, there was only one index scheme, which continues to be in existence.  This scheme tracks the NSE-50.  As against a CAGR of 10.6% pa for the NSE-50 TRI, the return on this scheme was 8.3% pa.
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