When an extremely smart friend – a young CA – about 15 years younger to me called me and said “there is no style purity in Icici Pru Val discovery fund” I was surprised. I do know that a Val discovery fund CANNOT have a style purity!! It has to be market cap agnostic, industry agnostic, be driven by numbers like PE, and create value in the long run. So when you have a 8-20 year view, I Pru Val discovery fund is a good fund. If you expect it to beat the bench mark on a quarter to quarter basis, you are better off with Franklin India Bluechip fund.
This brings us to a few friends of mine who are the ‘style purity’ police. Police at least have power, these people have no action plan. They can only get out of a fund (which is a right decision) when it changes style.
Let us see the problem from the fund manager’s point of view – there is really speaking no ‘value’ benchmark. At least if I am a fund manager managing a value fund, I would tell my investor the following – I am –
- market cap agnostic
- industry agnostic
- to deploy cash will take a position based on derivatives
- invest abroad if the yields look interesting – AFTER currency fluctuation
- will sit on cash for long periods of time, if need be
- when a share I own reaches ‘over value’ I may find some OTHER reason to hold on to the share
- at a particular amount of AUM, I will do closet indexing in the interim period
If you are a long term investor the question to REALLY ask is “is the fund going towards meeting my goal”. Sadly too much time is spent on a) does it beat the index b) style purity c) turnover ratio and d) of course, costs. Big distributors and banks (of course!!), influential financial planners, etc feel that a good mutual fund practices style purity — meaning that it always invests your money in exactly the same way. This looks good on paper – at least you will not be surprised to see mid caps in a blue-chip portfolio. Sounds good? Well, the devil is in the details.. Once you’ve decided you want x% of your money in a fund that holds index shares you’d be surprised to find many companies based in Asia, will you not? Similarly, a large-cap growth fund is supposed to buy only large companies with rising earnings. And a mid-cap fund belongs firmly on the border – never tilting toward big or little shares.
Now a discovery share can find value:
- in a low PE ratio
- in a low PB ratio
- in a share growing at a rate of 30% but the pe is 21
- In the superior growth rate vis a vis the industry
- in a huge industry with huge potential but currently underpriced
so how do I get value is up to me, and when I get rid of the same share is again up to me.
The problem is I can see value in growth too!! I can sometimes see value in good management – no I cannot give examples, but look at the I Pru portfolio and you will know what I mean. I may be able to find value in a beaten down infra company whose management is not of the greatest quality – like GMR at Rs. 10. Of course I may sell it off at 40 when I THINK I HAVE GOT the value of the purchase. Suddenly in my mid cap portfolio what if I find Tata DVR as a good bet HOPING that the discount keeps reducing? Or I am pessimistic about pharma and IT but find value in Biocon and Mindtree? Oops. Right?
In the CORRECT chase of a good share, the fund manager has done a style drift. Does the investor worry about this? No. Not unless some joker (like me for instance) point it out! To the research intellectuals this is a sin – after all the investor wants Coke in a Coke bottle, not Pepsi, they tell you!
I like style, but I refuse to be a style police (or a style tyrant?). I realize that I need to take time to think what the FM is doing. Maybe drop him a mail or sms. Stick around. If he is helping me meet my goals, in a value find I do not see how he/she can stick to one of the pigeonholes picked by Morningstar or Valueresearch. I prefer circles…remember Venn diagrams??
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