Wherever I go I am asked one question: How often should you evaluate a fund and what should you do about it?
My answer: I wish I knew how to answer this question.
I do not believe that the mathematical fund evaluation makes any sense unless you understand how a fund manager operates. You have to go by 2 major things:
Benchmark against the index mentioned and
Let us take the performance of Icici Prudential Value Discovery Fund. I have invested in this fund from time to time and in my head it is still a Naren fund – the core philosophy is Value. I of course have a violent difference of opinion about a value fund holding on to shares AFTER THE VALUE is discovered. However one Value fund manager (no not connected with this fund) argued that sometimes value can come from growth. So a Maruti Suzuki and Hdfc bank may be in this fund for their future growth and not necessarily for the value. Again in my head this is not right, but that is my problem, not yours nor Narens.
Let’s take the ‘stated benchmark’ – it is the SnP BSE 500. Now a multicap fund with about 60% large cap fund (it is market cap agnostic) I am not so sure about the appropriateness of the benchmark itself. The fact is that I Pru Discovery is comfortably beating the ‘benchmark’ for the past so many years. However in the past one year it is a slight under peformance – no it does not bother me.
So we are not sure about the appropriateness of the benchmark -WHY SHOULD WE COMPARE the benchmark at all? In most interviews or in a fund evaluation class no one mentions the problem of bench marking. This is, the biggest problem in the fund world.
That brings us to the ‘peer comparison’ – Valueresearchonline tells me that since this fund is a multi-cap fund it should be compared to the following funds:
Franklin India Hi Growth Fund, Ivesco India Contra fund, R*Shares Junior Bees, and SBI Magnum Multicap fund.
You can do exactly what I did. Laugh.
Take the case of large cap funds. Franklin India Bluechip is an older fund and Icici Prudential has a fund named as ‘Focused Bluechip’. Other conditions remaining same, I would go for an older fund – FIBC was launched in 1993 and Icici fund in 2008. Statistically, more data is better than less data especially while sampling. If you go to Morningstar.in and do a comparison, there is very little to pick as a ‘distinguishing’ feature between the 2 funds. So what do you go by? I prefer FIBC because it gives the fund manager a wider range of choice, and Focused BC is now no longer very ‘focused’. So closet indexing is not far away from the corner. More importantly most people compare the fund performance to the Sensex – over a long term it should be compared to the TRI – THE TOTAL RETURN INDEX. On most parameters over a 5 year period Focused Bluechip can look better, but the fund manager longevity tips the scales favoring Franklin Templeton. However the largecap is likely to be the first place where a good Index ETF maybe better (going forward) notwithstanding past performance – but as of now all these guys are generating an alpha.
Even worse, people are good at judging by looking at the result and not at the processes. I remember the fund manager of FIBC saying ‘went wrong with picking Navratnas’ – true, psu underperformance has hurt many people…like Prashant Jain and Ramdeo Agarwal too. Seriously these 2 funds are not exactly comparable even though both are classified as ‘large cap’ ..
This is saying let us compare a zebra to a tiger – both have stripes. I Pru is a market cap agnostic fund -which means its value capture can go across asset classes. So if a fund manager feels that all the value in the mid cap have already been captured, so now let me look for value in the large cap. He can also decide to sell Hdfc bank because the value has been captured.
However, if he outperforms because HDFC BANK performs well – why is he not a growth fund? Well his argument is ‘Value in Hdfc bank is coming from the growth’. Well, I rest my case – it is getting too complicated.
So here is a fund which is NOT true to its label (a value fund should sell the share once the value is discovered), the benchmark is wrong (a regular index can NEVER be the index for a value fund), the peer group is ridiculously off the supposed philosophy of the fund. So technically I do not like the fund. Its rank is also slipping – from 1/40 to 97/143.
However I have been an investor who believes that if the fund manager’s philosophy towards a fund is broadly right, the fund manager has a good history, I personally know he is honest, I should just stick around.
Maybe once in a while wonder aloud whether there is a departure in value spotting…but my 10 year history in this fund has left me with greater pleasure and zilch regret.
Fund evaluation, my foot. What has happened over the last 20 years is that we’ve created a mass of various fund styles that don’t really do anything that much different than an index fund. More over most funds do not have a publicly stated fund styles. If they do have an internal document, we do not know whether the Trustees hold them to a rigor. I can imagine a Trustee meeting saying nice things to a successful fund manager (remember we judge by results, not by processes).
For instance, most “large crap growth or value” funds are really just closet index funds. If you ran the risk adjusted returns on these funds you’d notice that the correlations are HUGE and that they are basically just fee sucking closet index funds. They add literally NO value to your portfolio when compared with the index fund. Even better create a value portfolio in your head – with shares that you believe in. Keep comparing the phantom portfolio with the actual.
Like I said earlier…………..Fund evaluation? my foot.
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