Motilal Oswal Asset Management Company Ltd. (MOAMC) is a public limited company incorporated under the Companies Act, 1956 on November 14, 2008, having its Registered Office at 10th Floor, Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai - 400025.
Motilal Oswal Asset Management Company Ltd. has been appointed as the Investment Manager to Motilal Oswal Mutual Fund by the Trustee vide Investment Management Agreement (IMA) dated May 21, 2009, executed between Motilal Oswal Trustee Company Ltd. and Motilal Oswal Asset Management Company Ltd.
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Motilal Oswal 5 Year G-Sec Fund of Fund (G) - 10.1178Motilal Oswal Asset Allocation Passive Fund of Fund – Aggressive (G) - 11.5983Motilal Oswal Asset Allocation Passive Fund of Fund – Aggressive-Dir (G) - 11.693Motilal Oswal Asset Allocation Passive Fund of Fund – Conservative (G) - 11.1433Motilal Oswal Asset Allocation Passive Fund of Fund – Conservative-Dir(G) - 11.2387Motilal Oswal Dynamic Fund (Div-A) - 13.0657Motilal Oswal Dynamic Fund (Div-Q) - 11.3125Motilal Oswal Dynamic Fund (G) - 15.3263Motilal Oswal Dynamic Fund-Dir (Div-A) - 13.4319Motilal Oswal Dynamic Fund-Dir (Div-Q) - 11.6494Motilal Oswal Dynamic Fund-Dir (G) - 16.418Motilal Oswal Equity Hybrid Fund - Direct (G) - 16.2067Motilal Oswal Equity Hybrid Fund - Regular (G) - 15.2217Motilal Oswal Flexi Cap Fund(D) - 23.0931Motilal Oswal Flexi Cap Fund(G) - 32.964Motilal Oswal Flexi Cap Fund-Dir(D) - 23.3502Motilal Oswal Flexi Cap Fund-Dir(G) - 35.6314Motilal Oswal Focused 25 Fund - Direct (D) - 20.292Motilal Oswal Focused 25 Fund - Direct (G) - 37.1795Motilal Oswal Focused 25 Fund (D) - 18.003Motilal Oswal Focused 25 Fund (G) - 32.8989Motilal Oswal Large and Midcap Fund - Dir (D) - 15.7595Motilal Oswal Large and Midcap Fund - Dir (G) - 16.9334Motilal Oswal Large and Midcap Fund (D) - 15.0549Motilal Oswal Large and Midcap Fund (G) - 16.1552Motilal Oswal Liquid Fund - Direct (Div-D) RI - 10.0077Motilal Oswal Liquid Fund - Direct (Div-F) RI - 10.0043Motilal Oswal Liquid Fund - Direct (Div-M) - 10.0493Motilal Oswal Liquid Fund - Direct (Div-Q) - 10.0652Motilal Oswal Liquid Fund - Direct (Div-W) RI - 10.0058Motilal Oswal Liquid Fund - Direct (G) - 11.5604Motilal Oswal Liquid Fund - Regular (Div-D) RI - 10.0055Motilal Oswal Liquid Fund - Regular (Div-F) RI - 10.0042Motilal Oswal Liquid Fund - Regular (Div-M) - 10.0487Motilal Oswal Liquid Fund - Regular (Div-Q) - 10.0635Motilal Oswal Liquid Fund - Regular (Div-W) RI - 10.013Motilal Oswal Liquid Fund - Regular (G) - 11.4972Motilal Oswal Long Term Equity Fund (D) - 19.2744Motilal Oswal Long Term Equity Fund (G) - 26.3435Motilal Oswal Long Term Equity Fund -Dir (D) - 23.2551Motilal Oswal Long Term Equity Fund -Dir (G) - 29.1327Motilal Oswal Midcap 30 Fund (D) - 27.5907Motilal Oswal Midcap 30 Fund (G) - 48.4015Motilal Oswal Midcap 30 Fund-Dir (D) - 28.8756Motilal Oswal Midcap 30 Fund-Dir (G) - 53.7168Motilal Oswal MSCI EAFE Top 100 Select Index Fund (G) - 9.6619Motilal Oswal Multi Asset Fund - Direct (G) - 11.1077Motilal Oswal Multi Asset Fund (G) - 10.7928Motilal Oswal Nasdaq 100 FOF - Direct (G) - 22.74Motilal Oswal Nasdaq 100 FOF - Regular (G) - 22.4053Motilal Oswal Nifty 200 Momentum 30 Index Fund - Direct (G) - 9.3099Motilal Oswal Nifty 50 Index Fund - Direct (G) - 14.865Motilal Oswal Nifty 50 Index Fund (G) - 14.7033Motilal Oswal Nifty 500 Fund - Direct (G) - 17.2385Motilal Oswal Nifty 500 Fund (G) - 16.9119Motilal Oswal Nifty Bank Index Fund - Direct (G) - 14.2164Motilal Oswal Nifty Bank Index Fund (G) - 13.9372Motilal Oswal Nifty Midcap 150 Index Fund (G) - 20.348Motilal Oswal Nifty Midcap 150 Index Fund-Dir (G) - 20.7802Motilal Oswal Nifty Next 50 Index Fund - Dir (G) - 14.912Motilal Oswal Nifty Next 50 Index Fund (G) - 14.6526Motilal Oswal Nifty Smallcap 250 Index Fund (G) - 19.6016Motilal Oswal Nifty Smallcap 250 Index Fund-Dir(G) - 19.9979Motilal Oswal S&P 500 Index Fund - Direct (G) - 15.2425Motilal Oswal S&P 500 Index Fund (G) - 15.0232Motilal Oswal S&P BSE Financials ex Bank 30 Index Fund (G) - 10.2366Motilal Oswal S&P BSE Financials ex Bank 30 Index Fund-Dir (G) - 10.2395Motilal Oswal S&P BSE Low Volatility Index Fund (G) - 10.7395Motilal Oswal Ultra Short Term Fund - Dir (Div-D) - 10.2879Motilal Oswal Ultra Short Term Fund - Dir (Div-F) - 10.313Motilal Oswal Ultra Short Term Fund - Dir (Div-M) - 10.295Motilal Oswal Ultra Short Term Fund - Dir (Div-Q) - 10.4443Motilal Oswal Ultra Short Term Fund - Dir (Div-W) - 10.3001Motilal Oswal Ultra Short Term Fund - Dir (G) - 14.5775Motilal Oswal Ultra Short Term Fund (Div-D) - 10.182Motilal Oswal Ultra Short Term Fund (Div-F) - 10.1945Motilal Oswal Ultra Short Term Fund (Div-M) - 10.1838Motilal Oswal Ultra Short Term Fund (Div-Q) - 10.3305Motilal Oswal Ultra Short Term Fund (Div-W) - 10.187Motilal Oswal Ultra Short Term Fund (G) - 14.0237

The trap of chasing winners

Blog Blog Details
  • June 22, 2021
  • Anuj Desai|
  • Analyst
How often does it happen? You are at a toll plaza looking to quickly exit, you pick a certain toll booth lane and suddenly you notice that the queue at the other toll booth lane is moving faster. So you quickly switch the queue, only to find that the earlier queue is now moving faster. Haven’t we all been there - cursing ourselves?

Similarly, a lot of investors see this happening with their portfolio. To increase their portfolio returns, investors fall into the trap of chasing funds purely basis their recent past performance. All mutual funds discretely state in their marketing collaterals that past performance may or may not sustain, yet funds that delivered superior returns over the recent past tend to attract relatively higher cash inflows. Have you also been doing this - when a fund underperforms, you are tempted to liquidate your position and switch to a top performing fund? Then even you are chasing performance.


The hunt for easy signals

It has been observed that investors while making their investments swear by the star rating provided by different agencies. These star ratings are a result of a composite score considering the risk return profile of a fund, some consider other factors as well but overall past performance plays a major role in ratings. The argument against usage of star rating is that they include past performance and investors use these rating as easy guidance for their investing journey. Back in 2010, Don Philip from morning star said the following:

"The Morningstar rating for funds is a grade on past performance.  Period.  No one at Morningstar ever claimed that the stars have predictive power or ever ran an ad telling investors to follow the stars to riches."

Investor seek ‘easy to understand’ or eye grabbing indicators. It’s imperative for investors to understand that relying on such signals doesn’t shore up wealth, instead investors should use such signals in addition to detailed research. 

This practice begs the question why do investors do what they do. One seemingly plausible explanation is that human brain has evolved to recognize patterns, it has helped humans survive and evolve. When we see any information, we try to create a pattern out of it, it helps us to process the information faster and take decisions. Sometimes these patterns hold true and sometimes they are merely a figment of imagination, but seeing patterns when it is not there is preferred over not seeing patterns.

Sneak peak into pitfalls of chasing past performance

A common practice that investors follow is that they look at past 1 year performance and invest in the top ranked schemes. We tried to replicate the same, based on past year’s performance (i.e. in 2010) we selected top 5 funds across categories (Large Cap, Mid Cap, Small Cap and Multi Cap funds) and plotted how these 5 funds fared across period in terms of ranking. The results speak for themselves.


The top 5 funds identified basis previous year performance went onto become bottom 5 performers at some point in time during following 10 years. Although these funds managed to reclaim the status of ‘Top 5’ funds (basis past 1 year performance) later sometime, but the investor may have missed out on this due to the chasing past performance strategy. 

Intrigued as to why this happens? The answer lies In a famous book titled ‘Thinking Fast and Slow’ by Daniel Kahneman, the author has spoken about a statistical concept regression to mean- which says that any extreme events will revert to mean over a period of time. Simply put assume a fund that has delivered stellar/worst returns in one period, over the next period it will revert to mean. Investors need to bear in mind that regression to mean is a force to reckon with.

Some might argue that we cherry picked the timing to suit our study but that is not the case as this study spans across a 10yr period. Additionally, similar results were observed across 3year performance intervals (instead of 1 year in this case).

Simulating investor returns

To provide more insights on how prudent this strategy is, we simulated a general investor’s behavior and evaluated his portfolio performance. The simulation assumes that an investor looks at past performance of the scheme and invests in the scheme that has performed the best. 


An investor would have been better off staying invested in single fund tracking a low cost, broad based index. Investor also need to factor in the cost of churning the portfolio and the tax implication arising due to capital gains.

Behavioral Gap

We would all agree in the investing philosophy ‘Buy Low, Sell High’, but do we follow it in principle? A look at the actual fund flows shows a completely opposite picture. Funds that have performed well attract more cash inflows, while the funds that have performed poorly attract outflows indicating investors ‘Buy High, Sell Low’. Many studies have indicated that due to market mistiming, an average investor’s return lags that of fund returns.

“Money flows into most funds after good performance, and goes out when bad performance follows.” (John Bogle)

Imagine you sitting in front of your laptop scrolling through the performance of various funds and then selecting a fund. The performance you saw on the screen is called ‘investment returns’- it has an underlying assumption that you invest at the beginning of the period and then leave the investment untouched.

While the return noted by an investor is called as ‘investor return’- these are the real returns an investor realizes. More often than not, it lags the investment returns. This difference between the 2 returns is called as ‘Behavior gap’.

To provide further insights we simulated the behavior gap - Based on the monthly cash inflows/outflows in a fund we identified how a typical investor would have fared (investor returns), while the fund performance is basically performance of the fund over given time. For the 5 year period ended Jan 2021, the average investment return noted was 13.10%, while the average investor was 8.85%. The investor’s average returns lagged the fund returns by a whopping 4.25%.


Surprised? Blame your investing decision! Investing is driven by human emotions. Very often investors mistime the markets- They start investing when the markets are at highs and stop investing when markets are falling. This results in behavior gap.


Conclusion

To quickly sum up- Due to the dynamics of the market, consistently outperforming maybe difficult. Investors should select funds that are aligned to their style and allow the strategy to play out. Practicing ‘neglect’ has shown to benefit the investor. We need to relearn that sometimes ‘doing nothing’ is rewarding. Next time you find yourself tempted to switch to a better performing fund remember ‘You can’t drive a car looking in the rear view mirror’. 

Disclaimer and Risk
This article has been issued on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. The fund/funds mentioned herein is/are for explaining the concept and shall not be construed as an investment advice to any party. The information / data herein alone is not sufficient and shouldn’t be used for the development or implementation of any investment strategy. It should not be construed as an investment advice to any party. All opinions, figures, estimates and data included in this article are as on date. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers shall be fully responsible/liable for any decision taken on the basis of this article. Investments in securities markets are subject to market risks, read all the relevant documents carefully.

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