I recently attended an event which hosted the who’s who of the investment community. The event was vibrant with several interesting presentations, strategies and big talk. The best was reserved towards the end. The biggest/popular/visionary fund managers in the country took to the stage for a panel discussion in a jam packed room. As expected it was an entertaining and gyan filled dialogue which lasted for an hour. Most of which was advice to the lay investor on how to go about investing, avoiding common mistakes, greatness of the Indian economy, the triviality of a slowdown, the glorified art of stock picking….and so on. Generally the kind of talk given by a 6 footer dad to his 4 year old son about how to grow tall like him…!
Later the Q&A round was opened. Everything went well till the last question was asked …a visibly tired looking gentleman stuttered a very simple question…“I have been here all day listening to all of you patiently…and I am wondering…with all the best resources and strategies at your disposal why Sir, is my money invested with you in loss?”… the room that was roaring with applause suddenly fell silent.
The last two years have been excruciating for fund managers. Majority of the active managers have underperformed the broad market index and many of them loss making as well. This has made it difficult to explain to investors. The math just doesn’t work and they are left only with some nice story-telling.
The common myths about fund managers are that they are great visionaries and have information that the layman cannot access. Their instincts are better than others and they always choose the right stocks to make profits. But in reality, Fund managers are equally biased in their approach and fall prey to the market mayhem. Many of them carry a low score on timing the tops and bottoms. After all they are mere mortals!
That brings us to some fundamental questions … What are the capabilities over which a fund manager needs to be evaluated? What kind of value addition can they bring to your hard earned money? And finally why can’t you manage your own funds if you have the ability to earn it?
Clearly there are certain characteristics of fund managers that are over rated and there are others that are less appreciated. The table below will help compare and prioritize some of them.
When you invest through a fund manager you expect the following- a dedicated personnel who would take safe custody of your money and grow it as per the mandate. The mandate should clearly correlate with your risk profile and expected return. This is the area where most of the oversight takes place and it is generally assumed that all investors belong to the same herd and have the same characteristics. Another major miscommunication occurs in how the mandate will be achieved. Ambiguous strategies based on assumptions and storytelling will fail at some point. No fund manager is 100% sure that their strategy will hit bulls eye. However any strategy proposed should be backed by a rudimentary but robust process that should lead to the right outcome atleast in terms of the trajectory. It should be simple, scalable and workable in all seasons. Focus should be more on avoidance of ruin rather than maximization of return which means there must be more weightage provided to downside protection compared to upside potential. The real value of a fund manager rests here.
Finally, if you have made so much money why can’t you manage it yourself. This is because you may not have the temperament to do so. Your skills in generating income may come from the expertise in other areas. Investment in equities requires a different set of characteristics which primarily includes patience and disassociation from the emotion caused due to market movement. It would be best to outsource these characteristics if you don’t carry them. The fees to the fund manager is primarily justified for this reason.
In summary, the answer to the above question of why the money is at a loss despite having all the resources at hand would be… “markets are cyclical and every asset class passes through different phases of these cycles. Buying at a high price will warrant a loss, however good the stock may be. The role of the fund manager is to prudently allocate assets based on whichever part of the cycle prevailing, educate the investor on why such actions are taken; instead of attempting futile methods of predicting, timing and justifying the outcome of the investments.”