Heckyl Sentiment Index to help fund managers decipher news sentiment around portfolio

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Equity mutual funds have recorded nearly 4-fold growth in net inflows in the past six months. Net inflows in equity-oriented funds stood at a staggering Rs 76,065 crore for the first half of the financial year 2017, up from Rs 19,829 crore in the same period last year. At the same time, equity funds’ asset under management (AUM) grew 22% over the past six months primarily due to a surge in net inflows.

Heckyl has developed India’s first Sentiment Index for Mutual Funds. Our proprietary Sentiment Index offers a broad reading of collective sentiment through real-time analysis of news flow on the stocks within fund portfolio.

News, which drives the day-to-day movement in the stock prices, can help to predict fund performance. A positive news flow on the stocks within the portfolio could possibly indicate better returns ahead and vice-versa.

Heckyl Sentiment Index can help fund managers to decipher underlying sentiment around fund portfolio. Our Sentiment Index indicates bullish/bearish signals for equity funds based on the crossover of fast and slow moving averages of the daily sentiment index value. 

As a case study, Heckyl constructed Sentiment Index for HDFC Equity Fund.

HDFC Equity Fund, the country’s largest equity fund, has lagged behind its category with 9.2% growth in AUM over the past six months. Once a top performer, HDFC Equity Fund witnessed a deterioration in performance over the past few years. The fund has underperformed both the benchmark index Nifty 500 and its category in the past 3-years.

We back-tested 18-months data from April 2016 to September 2017 to measure the effectiveness of our Sentiment Index. Our back-testing has indicated a strong positive correlation (0.85+), implying that the Heckyl Sentiment index is an alternative proxy for HDFC Equity Fund.

We observed that when short-term sentiment (60-DMA) rises above long-term (120-day average), it tends to push HDFC Equity Fund’s net asset value (NAV) higher. On the contrary, when short-term sentiment (60-DMA) falls beneath long-term (120-day average), fund NAV tend to follow it down (See Image 1 below).

Sentiment 60 - 120 day average
Image 1: HDFC Equity Fund versus Heckyl Sentiment Index

 

Fund managers can use Sentiment Index to track the news sentiment around the fund. Based on the bullish/ bearish indications issued by Sentiment Index, fund managers can actively re-balance their portfolio from time to time.

Stock Sentiment Analysis

Fund managers can also measure news sentiment for individual stocks in their portfolio and align stock holding based on the bullish/ bearish indications.

For instance, ICICI Bank is fund manager’s favourite stock. HDFC Equity Fund has highest exposure (9.07%) to the India’s largest private sector lender.

Heckyl compared sentiment based bullish/bearish signals for ICICI Bank with its share price performance (See Image 2 below) to show how fund managers can use the sentiment score for individual stocks.

ICICI Bank - Sentiment 30-90
Image 2: ICICI Bank – Sentiment score, share price and fund holding

 

The crossover of fast (30-day) and slow (90-day) moving averages of the daily sentiment score highlighted bullish/ bearish zones for ICICI Bank (See image 2 above).

We noticed a strong positive correlation (0.85+) between ICICI Bank’s news sentiment (90-day average) and its share price. Such a high level of positive correction suggests that Heckyl sentiment score is an alternative indicator for individual stocks.

Since April 2016, the fund has gradually increased allocation to ICICI Bank. We noticed the first major increase in allocation of 5 million shares during October 2016, followed by 5.84 million shares in June 2017. It is interesting to note that all major portfolio increases coincided with bullish patterns on the Sentiment Index.

Bottom-line:
Heckyl Sentiment Index can help fund managers to pick up early indications of bullish/bearish trends for both individual stocks and overall portfolio. At the same time, they can re-balance their portfolio to capture change in sentiment. In our view, alternative data sets such as news sentiment can help them in their never-ending quest to beat the market.

To know more about application of Heckyl Sentiment Index for mutual funds, email us at info@heckyl.com

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