Fund Returns vs Investor Returns

In the last decade telecom was a flavor for many people. The TRAI, the listed companies, the failed companies, users,..however if you had invested in Idea or Bharti Airtel chances are as an INVESTOR you LOST money. However, I traded in Idea, Tata Teleservices, Bharti Airtel many times and came out trumps.

I know people who have lost money investing in Procter and Gamble, Colgate, Asian Paints, and Hdfc Bank. How does this happen? Simply because they come in pretending to be investors, but lose patience as an investor and run away like a trader.

Brings us to the amazing concept of Fund (Company) Returns vs. Shareholder Returns. As our ‘responsible media’ is busy doing articles like ‘top 10 funds to buy in 2017’ we do not have the time to do such studies. It takes a lot of data, and  some excel skills to do this study over long periods of time. Our Regulator of course is busy with other engaging work so he cannot find time to do this. I do not have the data or the back end ability to do this. So we ASSUME THAT in India fund returns and investor returns are the same. Wrong. Completely wrong.

Can you lose money in a fund that makes money? Oh yes you can. When you are attracted by hot performance of a well marketed fund or a theme – large cap, mid cap, pharma, banking….you rush to buy (after the fund goes up)  and then sell when it stays there doing nothing, or worse after it comes down! Making money in mutual funds is not difficult, but in a decibel media driven world, it is not easy either! Your investment results are a function of how the manager performs and your sensible reaction to the same. Fund manager performance appraisal is not easy – and the ad revenue driven media cannot do it sensibly. You are controlled by your behavior and if you are not guided by a WISE man or woman you will suffer from over expectation, performance anxiety, tension, and assured under performance. Unless you stay long enough with a good fund manager – for me the good fund manager comes AFTER good fund house having a good process – you will either lose money or under perform. So how you pick a fund is not as important as how you buy it, how you hold it, and what you do when that  fund is performing badly for 2 quarters. As a person holding shares of Colgate, Gillette, Supreme Industries, Cummins, Pfizer, Nestle, Siemens – ignoring the media has been very important. Even shares like Hdfc, Asian Paints, etc. have had their quota of going up and down. I see more investors who make money than traders who make money – OBVIOUSLY my sample is biased, but I do not know how to trade.

A fund returns 18.5% annual returns. So the fund returns are 18.5% and you assume all the unit holders made 18.5% (post expenses) returns on that fund, right? Not so fast. The Quarterly break up of this is as follows: 35%, -3%, 38% and 4% – you can actually see such results! So at the end of Q1 the Marketing and Sales team would have got additional budgets, fund manager interviews would have been plastered all over the country…and THE LIKELY fund flow would have been 1000, -900, 2000 for end of Q1, end of Q2, and end of Q3. End of Q4 will again see a big outflow. The unit holder returns will OBVIOUSLY the weighted average of the inflows and the return calculated on that – and that is likely to be very different from the 18.5% that we saw as the ‘fund returns’.

The lesser gap between Fund returns and Shareholder returns shows RESPONSIBLE sales by the fund and a MATURE investing public. Sadly our regulator does not even ask the fund houses to calculate shareholder returns. Why even our benchmarks IGNORE dividends, while funds get dividends….well a long way off I guess.

Even my investments in mutual fund – over say 18+ years in well performing funds like Kothari Pioneer Bluechip fund, Kothari Pioneer Prima fund, Zurich Top 200, Zurich Prudence, Zurich Equity fund – NONE OF THEM EXIST today in the original names, do they? But remember the fund managers have stuck around for a long time and I HAVE BENEFITED as much as the shareholders who paid a PREMIUM to ‘buy performance’.

See the standard deviation in all these schemes – and it required a deep understanding of fund managers and processes that allowed me to and forced me to stay with these funds. There have been many fund houses which have had brilliant performances but have not come into my ORBIT simply because the AMC were NEVER in my Quality / Process short list.

I will be doing a mathematical post based on American figures based on an article by Money magazine and quoted in an article on Bloomberg by research group – just do not know when…takes too much reading.

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2 Responses to “Fund Returns vs Investor Returns”

  1. Hi subra,

    Very interesting thoughts. Can you explain what are some of the qualities you look for in an AMC and how do you go about identifying the processes that in your mind are indicators of success and unit holder friendliness?

    Or to invert the question what are some red flags? What are actions that would cause you to swear off a given AMC?

  2. Mr. Aditya modi on December 1st, 2016 at 7:06 pm

    great post subra sir.
    can you please do a post on steps to be taken by senior citizens with limited retirement portfolio-provident funds mainly?.

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