How did asset classes perform in a difficult Samvat 2078?

21 Oct 2022 , 08:13 AM

The first 9 months of Samvat 2078 saw FPI outflows of $34 billion and there is no change in FPI attitudes yet. The war between Russia and Ukraine dominated the debate for a better part of the year and the geopolitical tensions still continue. But the biggest event of Samvat 2078 was the relentless hawkishness of global central banks. While the US Fed took the lead in  hiking rates in March 2022, other central banks including the ECB, BOE and RBI have followed suit.

As we welcome Samvat 2079 on 24th October 2022, it is time to look back at how the various asset classes and sub-classes performed. Obviously, asset classes can be discrete so we will avoid the very heterogeneous asset classes like real estate. We look at 3 basic asset categories of equities, debt and alternate hybrids. We use the mutual fund returns over the last one year as a proxy for asset category performance. Also, to give a sharper picture, the risk adjusted returns are considered instead of point to point returns.

How equity funds performed in Samvat 2078

The table below captures the risk adjusted returns of the various categories of equity funds. The returns are 1 year returns, as a proxy for returns since the start of Samvat 2078. For risk adjustment, we have used range as a measure of standard deviation for simplicity.

Equity Fund Category	Category Average	Top Performer	Bottom Performer	Range	Risk Adj Returns
Sector – FMCG	12.84	13.64	11.94	1.70	7.553
Equity-Infrastructure	4.22	13.67	-3.57	17.24	0.245
Contra	1.98	9.66	-2.52	12.18	0.163
Sector-Financial Services	1.57	5.63	-5.15	10.78	0.146
Small-Cap	1.24	14.53	-18.89	33.42	0.037
Mid-Cap	-0.90	18.74	-14.15	32.89	-0.027
Multi-Cap	-0.82	10.72	-7.59	18.31	-0.045
Large and Mid-Cap	-2.50	12.07	-15.77	27.84	-0.090
ELSS (Tax Savings)	-3.32	11.87	-15.37	27.24	-0.122
Focused Fund	-3.85	10.75	-18.02	28.77	-0.134
Value	-2.47	6.75	-7.69	14.44	-0.171
Flexi Cap	-3.96	6.92	-13.94	20.86	-0.190
Equity-ESG	-6.47	16.54	-16.49	33.03	-0.196
Dividend Yield	-3.38	3.08	-11.32	14.40	-0.235
Large-Cap	-3.92	4.22	-10.16	14.38	-0.273
Sector-Healthcare	-8.10	-3.65	-14.12	10.47	-0.774
Sector-Technology	-21.40	-15.61	-23.06	7.45	-2.872

Data Source: Morningstar

In the above table, the risk adjusted returns on the FMCG funds may appear to be inordinately high, but that is because there is just one fund considered in that category. Hence we will ignore FMCG funds as an outlier. What are the trends visible now in Samvat 2078 in terms of equity category performance? The broad takeaway has been that specific sectoral ideas with a strong domestic business component have outperformed other categories of equity funds in Samvat 2078.

Infrastructure funds and the financial services funds are largely domestic oriented and focused on the domestic markets. Other top performers have been mid-cap funds and small cap funds. These categories of funds have a very low global content to their business model and have been the best performers at a time when global macros have been in a state of flux. What about the bottom performers?

Not surprisingly, the businesses with a global content have been the underperformers in Samvat 2078 in risk adjusted terms. The two bottom performers are technology funds and healthcare funds. Both sectors predominantly rely on the US, UK and Europe for a chunk of their revenues. Even other sub-par performers like large cap funds and dividend yield funds are essentially funds with a strong global content. The theme of equity asset classes in Samvat 2078 has been “long on domestic plays and short on global plays”. But the equity story of Samvat 2078 is best summed by the fact that 12 out of the 17 categories of equity funds (71%) have given negative average returns in the year.

How debt funds performed in Samvat 2078

The table below captures the risk adjusted returns of the various categories of debt funds. The returns are 1 year returns, as a proxy for returns since the start of Samvat 2078. For risk adjustment, we have used range as a measure of standard deviation for simplicity sake.

Debt Fund Category	Category Average	Top Performer	Bottom Performer	Range	Risk Adj Returns
Long Duration	1.59	2.20	0.36	1.84	0.864
Ultra-Short Duration	3.76	4.86	0.06	4.80	0.783
Floating Rate	3.08	5.12	0.87	4.25	0.725
Money Market	3.70	5.22	0.06	5.16	0.717
Low Duration	3.33	4.70	-0.26	4.96	0.671
Government Bond	1.46	3.86	-1.92	5.78	0.253
Banking & PSU	2.32	9.22	-2.57	11.79	0.197
Corporate Bond	1.89	4.18	-5.63	9.81	0.193
Medium to Long Duration	1.67	8.51	-1.70	10.21	0.164
Short Duration	3.01	17.95	-1.87	19.82	0.152
Dynamic Bond	2.16	9.63	-6.18	15.81	0.137
Medium Duration	2.60	24.56	-3.00	27.56	0.094
Credit Risk	12.74	141.62	-0.03	141.65	0.090
10 yr Government Bond	-0.55	0.26	-1.33	1.59	-0.346

Data Source: Morningstar

The big story for the debt funds category in Samvat 2078 was the relentless rise in interest rates. In this case, the credit risk funds are an outlier. This category of funds got distorted due to one fund (BOI AXA Credit Risk Fund) which gave 141% returns since it had written down the paper of Sintex BAPL and Amanta Healthcare to zero last year and the recovery of amounts was shown as returns. We shall ignore this outlier when looking at the top and bottom performers in this category of debt funds.

The outperformance essentially came from categories like low duration funds, money market funds and floating rate funds; which are less vulnerable to a spike in bond yields. This was the story of Samvat 2078 wherein the RBI hiked rates by 190 bps since May resulting in a sharp spike in bond yields. The worst performer was not surprisingly, the10-year G-Sec fund, which is most vulnerable to interest rate risk.

The categories susceptible to price risk have been among the bottom performers in Samvat 2078.

How alternate funds performed in Samvat 2078

The table below captures the risk adjusted returns of the various categories of alternate funds, where we bunched all other categories. The returns are 1 year returns, as a proxy for returns since the start of Samvat 2078. For risk adjustment, we have used range as a measure of standard deviation for simplicity sake.

Alternate Funds Category	Category Average	Top Performer	Bottom Performer	Range	Risk Adj Returns
Gold Funds	4.54	6.19	4.24	1.95	2.328
Arbitrage Fund	3.72	5.26	0.52	4.74	0.785
Liquid Fund	3.78	6.24	0.01	6.23	0.607
Dynamic Asset Allocation	1.64	11.53	-5.48	17.01	0.096
Conservative Allocation	2.21	19.52	-5.54	25.06	0.088
Equity Savings	1.04	5.85	-7.02	12.87	0.081
Aggressive Allocation	-2.45	10.15	-11.53	21.68	-0.113
Balanced Allocation	-2.64	-1.66	-3.56	1.90	-1.389

Data Source: Morningstar

Ironically, despite the high interest rates and strong dollar, the macro and geopolitical uncertainty resulted in gold funds outperforming among alternate assets. In fact, if you leave out the outliers like FMCG funds and Credit Risk funds, gold funds have been the best performer across all asset categories; both in terms of average returns and in terms of risk adjusted returns.

Samvat 2078 has been a volatile and challenging year. Hopefully, Samvat 2079 should see more stability in asset class returns next year.