I just saw your latest fund research report. Why does Nippon Multi Cap have a Bronze rating when it is a 1-star fund?
Before I answer your question directly, let me explain the two different rating mechanisms.
This is a quantitative rating and is driven by risk-adjusted returns. It tracks the past performance of the fund over the last 3-, 5- and 10-year periods, and is generated by a system.
This is a subjective rating driven by analyst conviction. These ratings are forward looking in nature where an analyst gives an opinion on how the fund can be expected to perform over the long-term (around 5-year time frame).
An analyst evaluates a fund on three broad pillars - People, Parent and Process. A detailed study is conducted on these three parameters, which involves meeting the fund manager and the investment team, before a rating on a fund is issued. Performance and Expenses are also considered.
Looking at performance through two lenses.
Performance is evaluated very differently in both instances.
When it comes to the Analyst Rating, the focus is not just on outperformance or underperformance but to understand the reasons for the same.
From the perspective of an analyst, performance is an outcome of a strong team, robust investment processes and an investor focused fund house.
You must understand that every strategy goes through a rough patch. The analyst must evaluate the fund’s performance in relation to the investment strategy and the scenario in the market. If the market sentiment is adverse to a given investment style, the fund is expected to underperform. So, for instance, a value driven investment approach underperforming in a growth-oriented market is nothing to be alarmed about. The underperformance is understandable and explainable.
An analyst will not be too worried about underperformance as long as the potential is evident, the fund is adhering to its stated process, and the fund manager has displayed the ability to execute his process well over longer time frames.
As is evident, there is a significant element of subjectivity while analysing a fund’s performance. This is in stark contrast to the Star Rating where performance is purely a numbers game and a reflection of the risk-adjusted returns within its category. The reasons a fund may not fare well is due to underperformance in comparison with its category peers, increase in the risk levels and fall in the risk-adjusted returns.
Hence, the Star and Analyst ratings could be different. One is for checking past performance while the other is to gauge a fund’s potential to outperform going ahead. Therefore, they are also used differently. The Star Rating could be a very good tool to do the initial screening, while the Analyst Rating can be used to make investment decisions in conjunction with the investor’s investment objective and risk appetite.
The ratings of Nippon Multi Cap.
The multi-cap category is relatively new, having being launched towards the end of 2020. This category is small as well. Its investment mandate warrants a fund to invest 25% each in large, mid and small cap stocks. The category houses quite a few funds which were run with a rather different investment mandate earlier, and the same was altered to fit in this category’s requirement.
Nippon India Multi Cap Fund was traditionally run with a multi-cap approach and its investment mandate was largely in line with that of the multi-cap category. Therefore, the past performance of the multi-cap funds would be based on the investment style and portfolio construction at that point in time, which may be different from its current positioning and investment mandate. Therefore, for this category, one should look at past performance with a pinch of salt. The ideal way to look at the performance of the funds from this category would be from the inception of the category.
Analysis of Nippon Multi Cap Fund
Articles authored by HIMANSHU SRIVASTAVA
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