Hybrid (balanced) funds recent performance

Story I did earlier this week analysing recent performance of hybrid (balanced funds)

http://www.cogencis.com/differentiators/ShareNews.aspx?newsId=1029274

Hybrid funds record fall in Aug-Sep returns as equity mkt declines
Oct 3

NEW DELHI - The hybrid schemes of mutual funds, which have seen assets
rise multi-fold in the last one year, are struggling to deliver alpha returns
in the last two months on the back of equity market indices falling by around
2% on month.
The average net asset value of 52 equity-oriented hybrid funds fell at
the end of August and September, an analysis of data from Value Research
showed. These funds recorded positive on-month returns or a rise in net asset
value in the rest of the calendar year.
The average on-month return was (-)0.2% for these funds at the end of
last month, following an average return of (-)0.3% at the end of August. The
analysis covered returns of the direct plans-growth option of the hybrid
funds.
This follows declines of 2% and 1.2% on month in the equity market
benchmark index of Nifty 100 Total Returns at the end of September and
August, respectively.
Many hybrid funds have been consistently having an exposure of 75-80% to
equities which suited them till recently when markets were doing well and
their performance was looking fantastic, according to Radhika Gupta, CEO of
Edelweiss Asset Management.
UNDERPERFORMANCE
The equity-oriented hybrid funds have also been underperforming in the
last two months, the analysis showed.
At the end of last month, the average one-year return of the funds under
review was 13.1%, which trailed a 13.5% one-year return a hybrid fund would
have got had it invested 70% in Nifty 100 Total Returns index and 30% in
10-year gilt paper.
As of the end of August, too, the average one-year return of
equity-oriented hybrid funds had trailed the derived benchmark. The preceding
two months, however, had seen these funds outperform (see table below).
According to Aashish Sommaiyaa, CEO of Motilal Oswal Asset Management,
hybrid funds were being promoted in the fund industry on the idea of
conservatism but many of these funds were taking aggressive bets in equities
with high-beta stocks in their portfolios.
"High-beta equity holdings can do enough damage to destroy whatever a
hybrid fund tries to cushion with debt," he said.
GROWTH DYNAMICS
Hybrid funds have seen net inflow of 389 bln rupees into them in Apr-Aug,
according to last available data from the Association from Mutual Funds in
India, 4.5 times more than in the same period a year ago.
This rate of growth is higher than 3.5 times on-year rise in net inflow
into equity funds to the tune of 581 bln rupees in Apr-Aug this financial
year. Debt funds, on the other hand, have seen net inflow fall 21% on year
for the same period.
Hybrid funds have become popular in the last one year among fixed income
investors who have been disappointed with declining interest rates from their
savings in banks.
As a part of their marketing drive on hybrid funds, many fund houses have
been promoting monthly dividend payout of hybrid funds in a big way,
according to Gupta.
But this has come with an underlying promise of monthly income and a
boost in returns from the equity exposure. But equity markets can fall
without notice, say mutual fund analysts, and expose the equity component of
hybrid funds to shocks.
"If you look at a month like September when a hybrid fund may be down
1-2% on month, the dividend payout may have to come from capital and not
reserves," said Gupta.
DEBT-ORIENTED HYBRID FUNDS
Other than equity-oriented hybrid funds, the mutual fund industry also
offers debt-oriented hybrid funds where the equity portion is sought to be
restricted to below 35%.
Among these funds, the ones with 30-40% exposure to equities have also
struggled to deliver alpha returns in the last couple of months.
The average returns of 19 debt-oriented hybrid funds with aggressive
equities component declined 0.1% on month as of the end of September, which
was the first time it recorded a fall as of any month-end in the current
calendar year, an analysis of the data under review showed.
However, on their one-year returns, these funds managed to offer an
average return which was higher than the benchmarks derived in the analysis.
At the end of last month, the average one-year return of the 19
debt-oriented hybrid funds was 10.8%. It was higher than what such a fund
would have got by investing 34% in Nifty 100 Total Returns index and 66% in
10-year gilt paper.
Going forward, if equity markets remain subdued and the performance of
hybrid funds suffers due to their equity exposure, the fund houses will find
it extremely difficult to position hybrid funds as an alternative to bank
deposits where a fixed rate of interest is assured and known upfront.
The table below lists one-year average returns of direct plans of
balanced funds and derived one-year returns of benchmarks.
As of end of:
----------------------------------
Sep       Aug        Jul       Jun
----      ----       ----      ----
Hybrid funds (equity oriented)    13.1      13.2       15.9      15.6
Derived hybrid benchmark*         13.5      13.3       15.8      15.2
Hybrid funds (debt oriented)      10.8      11.3       13.0      13.6
Derived hybrid benchmark**        10.1      10.1       11.4      11.2
*  Assuming 70% of equity (Nifty 100 Total Returns) and 30% of debt (gilts)
** Assuming 34% of equity (Nifty 100 TR) and 66% of debt (gilts)
End