Fund management is a unique service, different from anything else. Even though it looks like you are buying a service from a large corporate, you are actually hiring a specific named person for a specific task. You may be investing your money in say Mid- and Small-Cap Fund of Reliance Mutual Fund, but in reality, you are hiring Sunil Singhania to manage your investments. Of course, there are many corporate services from airliner piloting to courier delivery that are provided by a specific person. However, what is unique about fund management is that the service is provided by a specific named person and that this arrangement is actually required by the laws and rules under which mutual funds operate.
Sure, when you invest your money in a mutual fund, there are a lot of service aspects that the company provides but all these are just peripheral activities to support the core service — which remains that of the fund manager managing your money. This brings in a unique — and somewhat difficult to manage — element into taking care of your investments. Even though you are investing in a specific fund, you should actually be looking at the holistic track record of the fund manager across funds, across different time periods, and if necessary, across different fund companies.
This is something that naive mutual fund investors do not do. In fact, novice investors seem hardly aware of anything except the brand of the fund company. A lot of investors, when asked about which fund they have invested in, just says ‘SBI’, or ‘ICICI’, or ‘HDFC’. They seem hardly aware of the existence of individual funds, let alone fund managers. This is a far from satisfactory state of affairs. Investors ought to be much more knowledgeable about fund managers than they tend to be.
Of course, you can’t really blame investors for this state of poor knowledge. In India, the normal marketing and investor communications generally pays minimal attention to the fund manager. For obvious reasons, fund companies would rather build a brand around their own name rather than an employee who could possibly walk out of the door any day. To get the true story on fund manager’s quality and performance, one must access fund research of the kind that Value Research does.
However, even this is complicated by the fact that fund managers can be pretty mobile, both within and across fund companies. You can look at a fund’s past performance, see who the fund manager is, assume that the two are related, and yet be only partially right. That fund manager may have started managing a particular fund only a short while back. Or, the fund manager may have actually been working at a rival fund company and was managing a competing fund. This cross-fund and cross-AMC tracking of fund managers is a capability that Value Research uniquely possesses in India.
By identifying ‘India’s Best Fund Managers’, Value Research along with Outlook Business solves this problem for you. We have mounted an unprecedented research effort and created fund manager performance history across funds and fund companies. This has resulted in the unique scoring on which the rating of fund managers is based. You can read details of how we did it in the following pages.
However, of far more importance is for investors to understand the exact contribution of the fund manager to the actual returns that their investments generate. It’s important to understand the context in which the fund manager ratings must be understood. What I’ve written so far might make it appear that the fund manager is everything and the rest of the machinery is nothing. In reality, the native talent (or instinct or skill) that an individual may have has to be surrounded by a certain amount of restraint, of process, and of basic principles that are configured as rules that cannot be violated.
What are these constraints? For example, let’s say a fund manager is completely convinced about a particular sector or type of company. Unrestrained by process, he or she may increase exposure to a point where, if the original premise were to turn out to be wrong, it would lead to a big decline in the fund’s returns. These kind of things used to happen a lot more earlier when such processes were not in place. For example, during the 1997-2000 tech mania, many supposedly diversified funds were actually being run as technology funds. Some fund managers were so convinced about the tech sector and about specific tech companies that they had exposures as high as 45% to the sector and 30% to some decidedly weak tech stocks. Predictably, when the crash came, it was terrible for the investors in these funds. For some fund managers too, that turned out to be a career-ending phase, as it should have been. At the time, if those funds had norms for limiting exposure to specific sectors and stocks, then perhaps the worst could have been avoided. However, the story is a little more complex. Although the worst could have been avoided, the best would have been avoided too. During the phase when the markets were shooting up, funds with ‘sensible’ sector limits would have underperformed those who were going berserk over tech stocks. All this actually happened to a few funds.
In the two decades — give or take — since the beginning of the tech boom, there have been many other boom and bust cycles. However, in each successive one, we have seen less and less of the kind of problems we saw in the aftermath of the tech boom. Fund managers’ native instincts have matured, as have the processes that ensure that they stay within some safe norms. What’s more, the period of time that has gone by has led to a larger and larger proportion of fund managers being able to take the long view of investing history in India. The diversity of experience and the first hand feel for managing money over long periods has brought in a new, higher level of maturity among Indian fund managers.
Helping this process along is also the evolution of the corporate sector itself. Till one point of time, it required much more reading between the lines and following one’s instincts to judge whether Indian companies were investment-worthy or not. Gradually (but not wholly), those days have gone past. To use an old computer term, on a relative basis, Indian corporates are now more WYSIWYG: What You See is What You Get. This lends itself more to principle-driven fund management and process-driven constraints. It’s basically a more evolved, more mature operating framework for investing.
And yet, outstanding investment results can only come from an approach that is different from the crowd. Processes, by their very nature, can only be defensive — they can’t create success. As investing maven and Warren Buffett’s deputy Charlie Munger says, “Mimicking the herd, invites regression to the mean.” If you do what everyone does, you can only be average. It’s only when someone diverges from the mean can they be better. But that needs judgement, talent and, maybe, luck.