Fund management fee: Against the trend

It is customary to say that a fund with a lower fee will perform better than a fund with a higher fee. People forget on very important thing here – there is a fundamental assumption that the skill sets in the fund management schemes being compared are THE SAME, and all other things are similar. False. Completely false.

As an important part of a big fund house even a smaller aum fund gets access to some of the smartest brains in the business. So immaterial of who handles Icici Pru discovery, the skill set of Naren Sankaran is available to him. The skills of Prashant Jain is always available for say Hdfc Midcap Fund. Some of the smaller fund houses do not have that luck or those who have corrupt fund managers may make a mess of your portfolio returns. We need to learn to pay for competence fund management. Inexpensive is good only if other parameters are the same!

Everybody who sings about one of the best and perhaps smartest businessmen in the world they forget how much is the fee he charges. Warren Buffet charges 25% of the profits as fees from people whose funds he manages. How many people are willing to pay that kind of fees? IN ADVANCE, not 30 years later in retrospect…

Remember the Fortune list has more wealth managers than people whose wealth has been managed. Wealth management always comes at a price – and quite high price.

For example a friend structures real estate deals for builders and gets other friends to invest in it.

The return for the investors?

About 14-21% p.a. depending on how the deal is structured and how much risk is borne by whom. He structures rent deals, ownership deals, private equity SPV, sale and lease back of luxury cars, …and he charges a fee based on each transaction. Frankly there is no way how he does transactions where he makes less than 5-7%  – but ensures that the borrower pays less than what he would if he did the deal with a bank. He also makes sure that the lender gets bank+2-3%.

The airwaves and the print media is full of index funds, cost is more important – after all we are all buying in the same market, sounds nice and cliched. Looks good on power-point, but it is absolute shit. Not that such deals are available to every body – each transaction has to be in multiples of Rs. 20 lakhs – so small retail please excuse. His real estate deals have yielded rates ranging from 12% to 35%, his derivative desk generates returns in the region of 20% per annum at least, his equity deals would be far superior to many mutual funds – have not seen his customers crib about what he makes. He recently came to me saying I sold Siemens and bought a house – it had cost him about Rs. 35,00,000 when he invested. He bought a house for Rs. 3 crores – by just selling those shares.

This is what we call selling 2 cats of $ 500 million to buy a dog for $ 1 billion. – Peter Lynch!

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