Total Returns Index

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Last month, in an attempt to provide better disclosure to investors, DSP BlackRock Mutual Fund decided to disclose performance of its active equity mutual funds with the Total Return Index (TRI) as a benchmark. Let’s understand what this move signifies. TRI takes into account not just the Price returns of the stocks but also the dividends paid out on the stocks. The typical dividend yield on our benchmarks is in the ballpark of 1.5% p.a.; this means that the TRI benchmark will be harder to beat by 150 bps p.a. Globally, Total Returns Indices are commonly used as the primary benchmarks for comparing fund performance, but in India this trend is just taking off.

Using TRI paints a complete picture of the alpha being generated by active fund management. Mutual funds receive dividends and the same is included in the NAV, then why shouldn’t we use a benchmark that captures these dividends so as to make a fair and transparent comparison. Historically, Indian indices have always been tracked for the Price Return, but now you can find historical Total Returns data for most indices, although they are not widely tracked yet.

We compared the alpha generated by Large Cap Funds over the broader market benchmark both on a Price Return as well as a Total Return basis. As observed over a 5-year basis the Total Return of the S&P BSE 100 is 165 bps pa higher than the Price Return. As expected the number of funds beating benchmark drops from 85% to 58% after making a comparison with the TRI instead of the PRI. That said, this still a fairly healthy number of funds beating the benchmark. The reasons for this outperformance could be multi-fold – superior stock selection, off benchmark picks, style drift, inefficient markets, etc, but that is a discussion for another day.

We believe the move towards TRI is a positive one and would expect the other asset managers will follow suit soon. Making a comparison versus the TRI paints a fair and complete picture of the comparison of the alpha being generated through active management, so that investors can take a judicious call while making their investments. Funds should adopt this higher standard of reporting which increases the transparency to investors.

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