The alpha squeeze in Indian large caps – analysis by Prashant Mittal of Ambit Capital

Globally and more specifically in US, active v/s passive debate is going on for quite some time. There are advocates of both the worlds.
In India, due to increase participation of institutions in Index Funds & Exchange Traded Funds (ETFs), similar things have started happening – Large Cap Funds are under pressure.

Recently, we came across an analysis by Prashant Mittal of Ambit Capital, showing similar trend in Indian Large Cap Funds. Following is the gist of a report – “The alpha squeeze in Indian large caps

The analysis start with stating – Passive funds have gained at the expense of active funds in the US – which we all know. So we will skip this part and come to India.

In second part, Prashant talk about increasing efficiency of Indian Market. It is very easy to find price anomalies in an inefficient market where information is available to handfull of people (e.g. insider knowledge). However, as market becomes more efficient those handful of people losses their privilege and fails to generate superior returns as compared to entire market.

Taking this as a base, they analysed 19 funds mainly on the basis of the fund’s stated mandate (large cap focus) and the benchmark chosen by the fund (S&P BSE 100/ Nifty 50 /S&P BSE Sensex). Notably the number of funds is extremely limited before 2003. Also, given the list of funds contains those in existence today, the data suffers from survivorship bias which biases the returns in favor of actively managed mutual funds.

The analysis reveals, Large Cap Mutual Funds underperform S&P BSE 100 on a risk adjusted basis over long term (analysis based on data from Jan’91- Feb’17)

Large Cap Mutual Funds enjoyed significant alpha over S&P BSE 100 in pre-2010 era (based on data from January ’91 to December ’90), however such alpha is reducing post-2010 (i.e. from January ’10 to February ’17)

You can read the full report here:

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