Predicting Fund Manager Performance
There are various methodologies available to select which mutual funds to invest in — however, at the end of it all, one is still never sure as there is nothing predictive about any of these methods! Eventually, it’s a fund manager you are choosing — so you may know the risk style and stock selection but eventual performance? — impossible! Human behavior is unpredictable!

Why Diversification Matters
Mutual Fund advisors often recommend that their clients invest in a diversified basket of mutual funds — this is valid for multiple reasons including 1) Different portfolios and/or outlook, 2) Different styles of management, 3) Law of averages that some will do very well. And of course, most importantly, it is to also diversify away from the risk that selected fund houses may become “closet index funds” — even while charging you expenses of an actively managed fund!
There is a 5th very important reason to do so !
Factor 5: Fund Performance : Cyclical
History has proven globally that no fund manager can constantly beat indices — or even her peer group fund managers. Post the tumult of the SEBI recategorisation, this became more difficult- Recent performances showcase that — across equity categories , in the previous 6 months, hardly 50% of the schemes have outperformed their respective benchmarks. However, that is the subject of a different piece.
Being constantly in the top of the league is next to impossible — even in a simple category like Largecap Funds where there are virtually , at any point in time, hardly 50 stocks to select from. Why this happens may be due to a wide variety of reasons — as fund styles may differ from fund house to fund house even when the underlying portfolio may be the same — from Individual stock weightages to decisions on being value, contrarian or momentum to exit decisions on certain counters- all have an impact on eventual returns.
Cyclicality : Evidence from Recent Past
We took calendar year performance rankings of Largecap schemes from 2014 onwards (Largecaps as it is least troublesome — the universe for all the fund houses is smaller) and evaluated the annual performance of schemes that are best ranked today (descending order of basis last 1 year returns).
Their annual performance rankings within the space of 34 schemes present today are presented in the table below. (Example, Axis Bluechip is Number 1 on 1 year basis today but was ranked 31 in Calendar Year 2016)
Investors, like fund managers, should focus on consistency and predictability of returns rather than attempt to be top quartile performers all the time! That pays off in the longer term!
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