Mutual fund schemes that invest in shares of industry leaders underperform the broad markets

MUMBAI: Mutual fund schemes that invest in shares of industry leaders have underperformed broad markets across time periods. According to Value Research, a mutual fund tracking entity, there are four such schemes that offer to invest in shares of leaders in respective industries and all have lagged the large cap equity fund category in the one and three year time-frame.

Many experts ask retail investors to buy shares of leading companies in various sectors. The simple logic behind such is to participate in the possible upside offered by an established business at reduced risk. But when mutual funds put this strategy to practice the results are not really encouraging.

UTI Leadership Fund is the largest among these schemes with assets under management of Rs 617 crore as on March 31, 2012. The fund delivered CAGR of 5.64% and 1.58% over three and five year timeframe respectively. Over the same period of time, large cap funds as a category, has delivered CAGR of 7.32% and 3.98%.

Other funds that follow the strategy of investing in leaders in various businesses, include Daiwa Industry Leaders Fund (-5.52%), Religare Business Leaders Fund (-6.7%) and Sundaram India Leadership Fund - retail option (-8.37%). Numbers in the bracket connote one year returns of respective scheme.

Over last one year large cap equity funds as a category has lost 5.44%. Daiwa Industry Leaders Fund is a large and mid cap fund and the category has lost 4.99% over last one year. A point to note is Sundaram Mutual Fund has announced merger of Sundaram India Leadership Fund into Sundaram Growth Fund by 11 July 2012.

Sustained underperformance by these schemes has questioned the investment strategy of investing in industry leaders. Most thematic funds over last three years have underperformed diversified equity funds and leadership theme is no exception.

"Many sectoral leaders could not outperform average performance of their sectors over last couple of years. Reliance Industries in Oil& Gas is an example of this phenomenon. It is better to invest in diversified equity funds as investment mandate is not restricted to a theme," says Abhishek Gupta, CEO, Moat Wealth Advisors.