There are more than 40 fund houses and around 3000 schemes in India. An advisor can be completely bewildered by the choices available. Some advisors want to do right for their clients and go through the scientific route. They take an excel spreadsheet and plug in NAV data, and whichever fund manager has given the best return in a certain time period, they recommend the schemes run by the fund manager. This may not be beneficial to the investor as there is always a rider “past returns is not an indicator for the future”.
An even more ‘scientific approach’ taken by professional trackers is to apply a lot of statistical tools to the past NAV data and arrive at risk adjusted return measures. This does not benefit either as on a risk adjusted basis you will have made hugely inferior returns relative to best performers or even negative returns on your investments. Some look more deeply in to qualitative factors such as processes, experience of fund managers, brand etc. These do not help either as every fund house has processes, a reasonable brand and qualified fund managers.
There is one factor that you should consider in selecting a fund manager. That is commitment to fund management. Many of the money managers are committed to themselves; their aim is to make money for themselves first and if investors make money, it is incidental. Some committed money managers lose their commitment soon as they eye riches or power.
What is the commitment to look for? Fund managers should have a well established investment philosophy and should be able to stick to the investment philosophy at all points of time. The most talked about example is Warren Buffet who avoided technology stocks even at the height of the technology boom and suffered huge underperformance for long periods of time. Technology stocks did not fit into his investment philosophy and hence he avoided them. The burst in the technology bubble took back Buffet to where he belongs -- at the top. Investors who have an idea of the investment philosophy of the fund manager can even time their investments in funds. For example if you think infrastructure stocks are looking to be the best performers in the near future, it is best to invest with a fund manager who completely believes in infrastructure and has stuck to his philosophy at all times.
A single fund house cannot have many investment philosophies. Hence if a money manager is launching many schemes and has nominated the same fund manager to manage those schemes, it is best to avoid those schemes. A large cap stock picker will think differently from a mid cap and small cap stock picker. A macro driven fund manager like say George Soros is not as successful in picking stocks as he is in trading indices or currencies or commodities. A fund manager who talks technicals is best avoided as the money he is managing is not given to follow technicals. If you as the advisor recommend a fund that you think looks at fundamentals and is more long term in nature, but later you find it trades in technicals which is short term in nature, then you have made a wrong call.
Fund managers who take on more responsibility are diluting responsibility to their core responsibility which made them successful in the first instance. Wider responsibilities means less time spent on the core. Advisors will have to question the time the fund manager spends in managing their money.
Fund managers who are basically stock pickers turn macro many times and they then start trading in derivatives to try and boost fund returns. Derivatives are short term in nature and are liable to extreme volatility. For example, fund managers who hedge using index derivatives face huge losses if markets turn against them. Such fund managers are best avoided till they change their ways.
Stick to fund managers who stick to their investment philosophy, show commitment to the funds they manage and do not change course down the line.
email: arjun@arjunparthasarathy.com
