Low exposure to Adani stocks tilts active vs passive debate

Actively managed mutual fund (MF) schemes had been at the receiving end over the past few years for their inability to beat their benchmarks.

However, the slump in shares of Adani Group companies — two of which are part of the benchmark National Stock Exchange Nifty50 index — have helped them improve their performance vis-à-vis exchange-traded funds (ETFs) or index funds.

Nearly 83 per cent of large-cap schemes had underperformed their benchmarks in calendar 2022 (CY22).

However, the performance of actively managed schemes improved considerably during the January-March quarter (fourth quarter, or Q4) of 2022-23 (FY23) when shares of 10 Adani Group stocks saw wealth erosion of over Rs 12 trillion, following a scathing report by US-based short-seller Hindenburg Research.

As a result, the number of active schemes underperforming their benchmarks declined to 69 per cent for the 12 months ended March 2023.

In FY23, 40 per cent of active schemes outperformed the Nifty50 — the most popular ETF — compared with just 26 per cent in CY22.

Equity MFs run a huge underweight position on the Adani pack, with most schemes running at zero-to-negligible exposure.

With most stocks belonging to the power-to-port conglomerate clocking treble-digit returns in 2022, fund managers struggled to generate alpha.

However, the stance was vindicated when the 10 group stocks saw heavy losses during the January-February period this calendar year (2023).

The huge fall in some of the group stocks weighed on the performance of certain benchmarks like the Nifty50 and the Nifty Next 50.

“The underperformance of actively managed funds versus the index seen during CY22, and the improvement in performance in Q4 may be attributed somewhat to their underweight exposure to Adani stocks,” says Nirav Karkera, head-research, Fisdom.

Adani Group flagship Adani Enterprises (AEL) and Adani Ports and Special Economic Zone (APSEZ) are part of the Nifty50 Index, which fell 5.3 per cent during Q4FY23.

AEL slumped 54 per cent during the March quarter — the most among Nifty components — followed by APSEZ, which dropped 27 per cent.

Most fund managers abstained from investing in Adani Group, even before the Hindenburg report, due to concerns over excessive valuations and overleverage.

Karkera says there are other factors at play behind the improved performance of active schemes and not just on account of a slump in Adani stocks as they have limited weighting in the benchmark indices.

“Actively managed large-cap funds also hold meaningful exposure to stocks beyond the ones classified as large-caps.

"Many mid-cap stocks held by such large-cap funds performed well during Q4FY23 and contributed to the overall performance of these funds during the period.

"Additionally, during the tough phase that Q4FY23 was, cash and debt allocations supported actively managed funds, albeit in limited quantum,” he adds.

While the latest trend is encouraging for active fund managers, they will have to demonstrate continued outperformance to reverse the trend of more money flowing into passives, observe industry players.

In FY23, the passive assets under management (AUM) of the industry, including both active and passive schemes, swelled 34 per cent to nearly Rs 7 trillion.

The shift towards passives in the case of large-caps is also visible in the monthly inflow trend, whereby active mid- and small-cap schemes are drawing nearly double the inflows of active large-cap schemes.

In March 2023, inflows into small-cap funds were not just the highest in absolute terms, they were also the maximum as a proportion of AUM among all market capitalisation-oriented categories.