5 hybrids that warrant higher distributor mindshare

Wealth Forum is very happy to announce a new series of analytical articles under our Deep Dive segment. In this series, we will dive into each MF product segment to discern correlations between fund performance and sales of each fund in the segment.

- Are we really selling funds with the best long term track records?
- How are the funds we sell most stacking up on investment performance vs peers?
- Are there funds which are performing well but are getting very little share in sales?

For distributors and advisors, these reports can give you a quick point of reference to compare and contrast the funds in your recommendation list vs what is actually being sold in the market and to scan funds that are high on performance and low on sales share which you may want to shortlist for your own review, to decide whether they ought to find their way into your recommendation list.

For AMC sales teams, these Deep Dive reports can give you an objective independent assessment of how your funds in each category are stacking up on sales share and performance, where your funds warrant higher distributor mindshare based on performance and which funds need to improve fund performance to justify existing distributor mind and market share.

We kick off this series with the most popular category – equity oriented hybrids. This includes balanced funds, dynamic equity funds/balanced advantage funds and also solution oriented hybrids. Before we dive straight into the numbers for this popular segment, lets take a quick look at how we put these tables together and what they seek to convey.

Methodology

WeTo arrive at estimated net sales numbers, we look at month-end AuM of each scheme for the previous 12 reported months (in this case, Feb 2017 to Jan 2018) and month-end NAVs of these schemes. By stripping off the marked-to-market component of AuM change, we arrive at estimated net sales for each month for each scheme, over the last 12 reported months. Long term AuM growth trends are pretty straight-forward – we consider a 5 year period for this purpose (in this case Jan 2013 AuM vs Jan 2018 AuM) for each scheme. Likewise, fund performance is pretty straight-forward too – we look at 1 year performance and 5 year performance as representatives of short and long term performance.

All numbers – net sales, AuM growth and fund performance are ranked and split into 4 quartiles for each of analysis and comprehension. Here is how the 4 quartiles are depicted:

1st quartile – top 25% of funds on respective parameter – dark green colour
2nd quartile – next 25% of funds on respective parameter – light green colour
3rd quartile – next 25% of funds on respective parameter – yellow colour
4th quartile – bottom 25% of funds on respective parameter – red colour.

In an ideal world, funds that are top performers on long term returns as well as short term returns should be the ones that are in the 1st quartile on last 12 months sales as well as long term AuM growth. This would mean that the market is truly rewarding performance. So, greens across business and fund performance indicates a green signal for that fund.

Reds and yellows in fund performance accompanied by greens in business performance indicates that the fund needs to urgently improve its fund performance to justify the business confidence that the market has in it.

On the flip side, greens in fund performance accompanied by yellows and reds in business performance indicates high potential for more distributor mind and market share.

In addition to the colour codes which make a review of these tables easier, the actual market share numbers also tell a strong story – of funds which have strong potential to improve their market share and those who ought to feel vulnerable on likely drop in market shares.

Equity Oriented Hybrids : Business performance vs fund performance

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Equity Oriented Hybrids : Sales momentum over last 12 months

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Observations

1. The category has seen a staggeringly good business year, notching up over Rs.90,000 crs in net sales over the 12 month period Feb 17 – Jan 18. AuM of this category – which was only around Rs.13,000 crs 5 years ago, is today over Rs. 200,000 crs – with over half of that spurt coming in the last 12 months alone. What is even more noteworthy, is that sales momentum (Table 2) is only getting stronger with each quarter – growing from Rs.16,000 crs for a quarter to over Rs.26,000 crs by the end of the 4th quarter of the period under review.
2. The two biggest selling funds in this category – ICICI Pru Balanced and HDFC Prudence – have slipped into 3rd quartile on a 1 yr performance basis, though their long term performance is still in green zone. The market will want to see these business leaders’ performance to come back into green zone, given the amount of investor money that’s gone into them. A look at Table 2 suggests that distributors are allocating relatively less in recent months to these business leaders, as compared to the huge shares these funds received in the first 3 months of these 12 months under review. From a combined market share of 50% of net sales in the first 3 months, market share slipped to around 30% in the last 3 months. Near term performance does impact sales to some extent, it appears.
3. Among the 9 funds in the top quartile on 12 month net sales (Table 1), four appear well poised to continue their strong business momentum. The common characteristics are greens across all four parameters of business and fund performance in table 1 and an increasing trend in quarterly net sales market share over the last 12 months (Table 2). These 4 among the leaders of this segment include SBI Magnum Balanced, HDFC Balanced, Reliance RSF Balanced and L&T India Prudence.
4. ICICI Pru BAF seems to be a very interesting story – performance numbers have suffered (as of Jan 2018) as the fund’s equity allocation reduced in response to market valuations. With the ongoing correction in the markets, fund performance will undoubtedly be picking up, on a relative basis. What’s really noteworthy is the quarterly net sales story of this fund (Table 2) – market share has picked up from 2% to over 8% by the time markets peaked in Jan 2018. Distributors seem to have sensed an impending correction, which prompted them to allocate more into a fund that was well prepared to handle volatility.
5. ABSL Balanced 95 seems to be struggling a bit to hold onto its market share (Table 2), perhaps due to performance coming in at 3rd quartile (Table 1). Distributors will no doubt want to see this fund climb on fund performance, given the amount of investor money invested in the fund, and the strong equity credentials of the fund house.
6. JM Balanced Fund’s healthy 2nd quartile business performance score (Table 1) seems an aberration caused by a big spurt in sales in the last quarter (Table 2) – perhaps a dividend stripping story playing out here. It certainly can’t be fund performance that’s caused the sales spurt.
7. Principal Balanced Fund seems to be a good example of a fund that perhaps deserves higher distributor mind and market share on the back of fund performance. The performance topper over the last 12 months, with a sound long term performance track record too, got less than 1% of net sales in the last 12 months (Table 1). Market share is increasing (Table 2), which is an encouraging sign.
8. Invesco India Dynamic Equity and Mirae Asset Prudence are climbing steadily on quarterly sales market shares (Table 2) on the strength of sound near term performance (Table 1). Both have sales market shares of less than 1% - signifying potential for healthy increase in market shares, so long as they continue their strong fund performance. Again, good examples of funds that perhaps deserve higher distributor mindshare.
9. Two funds that don’t seem to be on distributors’ radars but perhaps should, on the back of strong fund performance are both solution oriented funds – HDFC Childrens Gift Fund and Tata Retirement Savings Fund – Moderate Plan. Both have posted top quartile fund performance over 1 and 5 years in this hyper competitive segment, yet are languishing in the 3rd quartile on sales and AuM growth, getting less than 0.5% share of sales in this rapidly growing segment of equity oriented hybrids. As distributors increasingly guide their clients towards needs and goals based SIPs, one would expect funds that are aimed at the two biggest goals – children and retirement – to see a lot more sales traction, especially if they are great on fund performance.
10. Two funds which are currently at the bottom of the league tables are quiet likely to fight their way back up. DSP BlackRock Dynamic Asset Allocation Fund will going forward be classified as equity oriented as it moves from a FoF structure to a regular structure. Tata Balanced Fund – once the market leader in the balanced category – has seen a steep fall after the exit of its fund manager and uncertainty in the fund house’s leadership structure. With a new business and fund management leadership in place, one should expect a performance turnaround, which can pave the way for business turnaround as well.

To conclude

The good news is that most of the funds that are being aggressively sold in the equity oriented hybrids space have performance to back them – which is comforting for investors who own them. The other piece of good news from an industry perspective is that sales share for the top 3 funds has dropped from a huge 60%+ in the first 3 months of the 12 month period under review to less than 45% by the last 3 months – which means more diversity, more choice, more competitive juices flowing – all of which is good for the investor.

There are however some pointers to distributors on funds that perhaps deserve a closer look on the back of strong fund performance and low business performance. There are equally pointers we have covered in these observations for AMCs on funds that need to address performance challenges to justify the faith that distributors and investors have placed in them.

We hope you find this Deep Dive on equity oriented hybrids useful. Coming up next in this series is the segment which is likely to see maximum traction in March – the ELSS category.

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