In a concall with fund manager, you want to ask the most pertinent questions, which will enable you to give the best advice to your clients. At CIFA 2019, Vidya Bala, Head of MF research, FundsIndia lists questions, which are best avoided and urges advisors to replace them with more insightful queries.
Do not ask- How much will the fund generate?
This question is irrelevant according to Vidya as it is difficult to predict returns in market-linked products. However, regularly enquiring about scheme performance may have a detrimental effect. “Performance pressure may cause fund managers to churn the portfolio excessively to deliver more returns. This may lead to sharp fluctuations in performance; for example in debt funds, the fund manager may increase his credit exposure to deliver higher yields,” she said.
Do ask - Will your scheme be able to beat the benchmark?
After introduction of TRI benchmark indices, it will be difficult for fund managers to generate substantial alpha (4% - 5%) over the benchmark, said Vidya. However, clients investing in an active fund expect at least 1-1.5% excess return over the benchmark as they are paying higher expense ratio. So do ask the fund manager how he will be able to outperform the benchmark.
Definitely ask - What is the reason for scheme outperformance?
This tells you whether the outperformance is sustainable, said Vidya.
She gave examples of a few schemes to explain her point. In a scheme where outperformance was driven by few top performing stocks, Vidya urged advisors to ask the fund manager his views on these stocks, his future strategy to understand if the outperformance would sustain or the returns would normalise the next year.
In short, she encouraged advisors to quiz fund managers on factors responsible for the scheme’s performance and his current sectoral bets as this will help them gauge the fund's potential to generate returns.
Understand the reason for scheme’s underperformance before taking a final call
Vidya urged advisors to probe a bit deeper in the issues related to the underperformance of the funds that recommended by them instead of immediately redeeming the client’s investments from the fund.
To explain her point further, she cited the example of a scheme, which had underperformed due to contrarian bets. Analysing its investments, Vidya opined that the fund had the potential to generate higher returns if the investment cycle turned.
Do not ask - Where will markets be in next few years?
Quoting Bloomberg data, she pointed out that the majority of forward estimates miss the mark. Hence, she advised against asking fund managers about making projections for market levels.
Do probe him on current market landscape
She believes that clear understanding of current market equips you to analyse potential. Quiz fund managers about why some sectors are in distress, why they continue to hold underperforming stocks. These questions empower you to make a more informed investment choice.
Do not enquire about the fund manager’s view on regulatory action
She called the question redundant, as fund managers have no control over regulatory policies.
Instead, try to understand whether fund managers are planning to make any changes in their investment strategy post policy and why.
Never ask - Which funds to recommend to clients?
Being an advisor means advising clients on investments most suitable for them. Without really knowing your clients, a fund manager is likely to offer generic advice, which may or may not be beneficial for your clients.
She concluded her session with a powerful message 'ask not what returns will the fund generate; see how much returns you can generate for your clients.’
