Equity funds pip Sensex in bull run

Equity fund managers do well in bull markets, but any signs of sideways or bearish sentiments, they underperform (or give lesser returns than that of) market returns, according to a study conducted by FE of decade long returns of diversified equity funds vis- -vis its benchmark indices.
For each (calendar) year, the returns of equity funds were compared with its benchmark indices which varied from Sensex (^BSESN : 17573.99 +101.43), BSE 100 to S&P CNX 500. In the bull market of 2009, when Sensex rallied 81%, almost all funds (97% of equity funds) outperformed (or gave more returns than) its benchmark index returns. But for the year 2010 till date, when the market has literally given no returns, the outperformance figure came down to 63%.
Long-term outperformance is key to the survival of fund managers and the fund management industry. Afterall, the mutual fund industry gets paid as management fees for its active fund management - which are typically 1-1.25% pa of assets.
But, any chances of sustained underperformance would mean the investors might shift to lower-cost index funds. In developed markets especially in US, a large proportion of equity funds are allocated towards index funds. This is because US fund managers are increasingly finding it difficult to beat markets year after year. However, in India, the case is different. In fact, in the entire bull market cycle, the outperformance figures have been around 92% on an average. What is worrisome though is what happens in a bear market.
The year 2008 was the worst year ever for the equity fund managers, when the markets tanked. Sensex fell by 52% in 2008 and only 4% of funds managed to give more returns than that of Sensex. In the bear market of 2001 and 2002, when Sensex corrected 18-20%, the outperformance was lower at 12% and 22% respectively. As a retail investor though, long term performance (3-5 year returns) is key - and here at least 80% have given more returns than that of its benchmark.
While this should keep the investors happy, a soul search also needs to be done as to how the returns were earned. While the long-term outperformance scorecard looks good for Indian equity fund managers, there is a crying need to stick to investment mandate.