Who’s the best NPS fund manager?

Whenever we’ve written on the National Pension System (NPS), a query that’s popped up often is – who’s the best NPS fund manager?  Apart from allowing subscribers to decide on their allocations between Equities (E), Corporate bonds (C ) and Government securities (G ), NPS asks you to choose from eight different Pension Fund Managers (PFMs) on its rolls.

We’ve already written a detailed article on how you should make your asset allocation choices under NPS. We now present an analysis of how NPS PFMs have performed across the three asset classes and tell you how you can make the final choice on PFM, both for your Tier 1 and Tier 2 accounts.

Not trailing but rolling 

While assessing the performance of any fund manager, it’s quite tempting to simply go by their latest report card. The NPS Trust website makes it quite easy to get at the trailing returns of PFMs by providing you with weekly updates. You can find the latest data here.

But the problem with going by the latest trailing returns is that it can be quite misleading. While trailing returns tell you a lot about how a fund performed between a specific start and end date, they tell you nothing about the consistency of those returns over the years. If your start and end dates are very different from those assumed in the trailing returns, the results may be misleading for you to apply to your investments.  

Rolling returns solve this problem by helping to measure the actual investor experience from an investment over many years. They assume different start and end dates on the investment a daily or a monthly basis and arrive at the real-life return experience for the investor. Rolling return analyses are thus a far better way to gauge a fund manager’s ability to deliver consistent returns than those based on trailing returns.

Here’s how we went about applying a rolling return analysis to the NPS PFMs.

• Of the 7 PFMs on the rolls, Aditya Birla Sun Life Pension Management has a short track record of under 4 years. As we wanted to study performance over a complete market cycle of 6 years, we excluded this PFM alone.
• Using historical NAVs from individual PFMs, we looked at the 1 year and 3 year rolling returns of PFMs at a daily frequency.
• We used NAV data for the six years ranging from October 2014 to October 2020, to strike a balance between going too far back in the past (the performance may not be relevant to today) and giving too much weight to recent returns. 
• We crunched numbers further to arrive at the average rolling return, standard deviation of those returns and the number of loss-making and profit-making periods for each PFM in each asset class. We also measured the number of periods in these six years, over which each PFM managed to outdo his or her respective benchmark. The benchmarks we applied were - Nifty100 TRI for Equities, ICRA Composite AAA Bond Index for Corporate Bonds and ICRA Composite Gilt Index for Government securities.
• Data for Tier 1 and Tier 2 accounts is presented separately.

Here are our conclusions.

Let’s look at the Tier 1 account first.

Best NPS fund manager for E (Equities)

With the benefit of a steadily rising corpus and predictable flows, one would expect NPS fund managers to deliver far better equity returns than their mutual fund counterparts. But an analysis of NPS PFMs shows that they’ve not lived up to this expectation.

The rolling return analysis reveals that average one-year returns for the 6 PFMs ranged from 4.34% to 7.43%. Standard deviations of 11.3% to 12.3% on those averages show that subscribers had a fairly bumpy ride on an annual basis.  Loss-making years were a fairly frequent occurrence, with PFMs delivering one-year losses 21% to 29% of the time.

Stretching the holding period to three years somewhat improved the return experience on all counts. On a three-year basis, the CAGRs stood at 7.55% to 10.09% for different PFMs. Volatility fell, with their standard deviation in the 4-5% range. The probability of making losses was lower at just 3-8% of the times, if you held on for three years.

But both over one year and three-year periods, PFMs fared poorly in beating the Nifty 100 Total Returns Index. The table below tells you that the best performing PFMs  in the equity category – HDFC and Kotak – beat the index just 38% of the times on one-year returns. HDFC beat the index about 28% of the time over three years. But most other managers did not keep up with the benchmark most of the time. This could be on account of the restrictions that NPS imposes on stock choices of PFMs, prompting them to stick mainly to large-caps. It could also be a sign that at the ultra-low fee of 0.01%, PFMs do not bother to very actively manage their NPS equity portfolios.  

Take away: The key takeaway for the investor is that if you can maintain the discipline of keeping up your annual contribution, not panicking on market falls and not dipping into your retirement fund until you hang up your boots, index funds offered by mutual funds that passively play on the Nifty100 basket may deliver better results than the E option of the NPS.

But if you are a newbie to mutual funds, value the tax benefits of the NPS or are prone to frequent withdrawals from your mutual funds, then the E option of NPS will deliver better results for you. In this case, HDFC Pension Management Company should be your top choice as the PFM for your equity money. HDFC has managed the highest average rolling returns both over 1 and 3 years with good downside containment and moderate volatility compared to peers. Please refer to this downloadable excel to know the numbers for all PFMs.

Best NPS fund manager for C (Corporate bonds)

In contrast to their equity performance, NPS fund managers have delivered a good show with corporate bonds.

The average one-year rolling return on C ranged from 7.69-8.84% across different managers. Unlike mutual funds focussed on corporate bonds, NPS funds registered hardly any losses over 1-year periods. All PFMs except LIC reported positive returns 100% of the time. But the standard deviations in returns ranged from 3.72 to 4.68% over one-year periods, suggesting high variability in annual returns.

The three-year rolling show was much better with CAGRs of 8.22% to 8.77%. Standard deviations were at less than 1% for all PFMs. Over a 3-year holding, most of the corporate bond managers of NPS also outperformed their benchmark most of the times. While HDFC Pension Fund managed this 93% of the time, ICICI Pru and SBI also managed to beat benchmarks over 70% of the time. Over three-year holding periods, all the PFMs entirely avoided loss-making periods  rom corporate bonds- an indication of the steady accrual returns from this asset class.

Overall, this return profile is indicative of very few credit events or duration losses afflicting NPS-managed corporate bond funds compared to mutual funds, probably on account of a buy-and-hold strategy and investment guidelines that require exposure only to gilts or AAA paper.

HDFC Pension Fund fared well in the corporate bond asset class too, with high average 3 year rolling returns at 8.71% (though this wasn’t the highest), a high likelihood of benchmark outperformance (93%) and relatively low standard deviation. ICICI Pru also manages a good show with the highest average return of 8.77% and index outperformance 72% of the time. Please refer to this downloadable excel to know the numbers for all PFMs.

Best NPS fund manager for G (Government securities)

NPS fund managers also showed a knack for wringing high returns out of government bonds, with greater consistency than mutual fund managers. One-year rolling returns on G were higher than on C, as fund managers probably made the most of rate falls in the last six years. The one-year rolling returns were 8.92% to 10.62% for different PFMs, with a high standard deviation of 6-7.1% - far higher than standard deviations of3-4.5% for corporate bonds. Unlike corporate bonds, on G, funds did suffer losses over 1-year periods 9% to 13% of the time. Differences between PFMs were also stark on outperforming the benchmark, with the proportion of outperformance varying between 46% for UTI and 77% for LIC Pension Fund.  

On a 3-year rolling basis though, PFMs managed to reduce loss-making periods from government securities to zero, with average CAGRs ranging between 8.23% and 9.84%. Standard deviations when held for 3 years also fell to a moderate 1-1.5%. Except for UTI the others managed to beat the benchmark in a majority of the periods. In this asset class, LIC absolutely stands out with a 100% hit rate against the benchmark over 3-year periods and a high average return of 9.84%. SBI appears the next best choice. Please refer to this downloadable excel to know the numbers for all PFMs.

Final choice - Tier I

The above analysis shows that different PFMs top the charts on different asset classes. But unfortunately, the NPS allows you to choose only one PFM across all three of your assets. We therefore suggest you choose your PFMs based on your allocation pattern in the three assets.

• If you have an equity-heavy portfolio, HDFC Pension Funds is a good choice.
• If you have high allocations to equity and corporate bonds, again HDFC Pension wins.
• If you have a government security-heavy portfolio, then LIC should be your top choice.

We also applied weights to different factors such as average rolling returns, downside containment and volatility to arrive at a suggested ranking for investors. Here’s how the 6 PFMs rank on this exercise for Tier I accounts, with two different allocation patterns.

Final choice – Tier 2

The rolling return analysis yields slightly different performance numbers for NPS Tier 2 accounts. So briefly, here are the best PFMs for your Tier 2 account across the three asset classes.

• On equities, HDFC Pension Fund scores with the highest average 1 year as well as 3 year rolling return of 7.41% and 10.27% respectively. It also had the lowest proportion of negative periods (3%) over 3 years and outperformed the benchmark 56.87% of the time on a 3-year rolling basis. No other PFM came close on benchmark outperformance with the ratios at 0 to 2.6%.
• On corporate bonds, again HDFC Pension Fund topped with highest 1-year rolling return of 8.9% and 3-year rolling return of 12.97% which was way ahead of its peers. The variability of its returns was high with a standard deviation of 1.22% for 3-year periods. While none of the PFMs witnessed any lossmaking periods over 3 years, HDFC scored by virtue of outperforming its benchmark 100% of the time versus 46-72% for its competitors.
• On government securities, LIC Pension Fund topped the ranking with both 1 year and 3 year rolling return averages, at 11.24% and 10.04%, well ahead of peers.  None of the FMs had any lossmaking periods over 3 year holding periods. But LIC scored by outperforming its benchmark 95.7% of the time while others managed to attain this feat only 43-81% of the time.     

The above numbers suggest that investors with an equity or corporate bond heavy portfolio should opt for HDFC as PFM while those with a government bond tilt should go for LIC Pension Fund.

Please refer to this downloadable excel to know the numbers for all PFMs.

We used metrics such as average rolling returns, downside containment, standard deviation et al to arrive at our own rankings of Tier 2 PFMs. The table above this section has the Tier 2 rankings as well.  

We will be periodically reviewing the performance of NPS funds. We will also be coming out with a NPS tool (in a few quarters) that allows you to arrive at the ranks for different asset allocation patterns! This is exclusively for subscribers!

With data inputs from Anush Raj P