Morningstar has always been a proponent of long-term investing and we often write about how investors should not buy or sell a stock or fund based on its short-term performance.
To highlight the point, we decided to scout for funds that performed worse than their benchmarks and the category average in 2011 but which have a decent long-term track record.
The filters we used to screen the funds were: open-ended funds with at least a five-year record and a Morningstar star rating of 4 or above (to indicate strong historical risk-adjusted performance compared to peers). We then picked five funds that fared the worst in 2011.
Here are the results:
Baroda Pioneer Growth
The fund lost 30.03%, compared to 25.73% for the BSE 100 and 24.47% for the average large-cap peer.
Among its top five holdings (data as of November 2011), heavyweight Reliance Industries was down about 35% for the year, infrastructure giant Larsen & Toubro plunged about 50% while ICICI Bank was off 30%.
But the fund carries a four-star rating by virtue of its superior performance across a five-year period, where it beat the BSE 100 by 320 basis points and the category average by 261 basis points.
Overall, according to Morningstar's measures, the fund has delivered above-average return while taking on average risk.
Reliance Regular Savings - Equity
The fund took big sector bets--for instance, going underweight on consumer defensives--and loaded up on mid-cap stocks (data as of November 2011). It was down about 30% for the year.
But over the 5-year period ending December 31, 2011, it logged 8.28% compounded growth, and ranks 16th in its peer group.
The fund is also under Morningstar's analyst coverage and carries an Analyst Rating of 'Bronze'.
Templeton India Growth
The 'Silver' Analyst-rated fund was down 29.5% for the year. The Analyst Report notes that the fund's strategy to deviate significantly from the benchmark can lead to strong under-performance over shorter timeframes and it was on display in 2011.
But over a 5-year period, the fund helmed by emerging-markets guru Mark Mobius has delivered 7.04% annualized and carries a 4-star Morningstar rating, signaling strong risk-adjusted performance compared to peers.
Reliance Vision
Reliance Vision fell 28.5% for the year. Over 3 years, the fund has returned an annualized 14.5%, underperforming the benchmark (16.7%) and the category average (22.3%).
The fund also has an average 5-year record but what helps the fund achieve a 4-star overall rating is a superior 10-year performance where it returns about compounded 30%, compared to 17.5% for the benchmark.
SBI Magnum Sector Umbrella Contra
Similar to the previous one, this fund has poor 1- and 3-year track records, logs an average showing over a 5-year period but has delivered a blowout performance over 10 years.
In 2011, this go-anywhere, contrarian fund lost 28.24%, thanks in part to the performance of its top holdings--State Bank of India and ICICI Bank (down over 40% each) and Jindal Steel & Power (dropped 36.5%).
The article is for information purposes and should not be construed as investment advice.
