Let us go back to 1999. A fund manager – let us call him – Amit Sitaraman – was a successful guy who got you 3.8% alpha. The media ate out of his hand and he pooh pooed the index funds. He was not really competent, he was guessing, and his company did not have too many rules about diversification, market cap restrictions, etc. He filled the portfolio with small cap stocks especially in the IT field and created alpha.
Come to 2019. Same fund manager or a similar fund manager. He can no longer fill his fund with cross market capitalization. He has to stick to rules made by the regulator. He needs to be clear – is he large cap or small cap or mid cap. He has to say whether he is Value or Momentum. He is far more restricted in his ‘go anywhere you want fund’. My portfolio is a ‘go anywhere you want fund’ – so on a Monday morning I could be shorting Indigo and buying Spice Jet – a typical fund manager will find this difficult to justify. On Tuesday I may be reversing the decision…or doing the same thing again.
For a fund manager he is likely to be caught with his incompetencies sooner in 2019 than say in 1999. Today you can isolate his skill and his luck – and he could anyway not have picked stocks from a full range of say 3000 stocks in the universe of the the FM. What would fund managers like Amit do under such circumstances? Well he could choose a different profession, or retire – after all if he was a good FM he should have created a good fortune for himself. Oops no. He had kept all his money in bank fixed deposits and of course had no ESOP.
Researchers can dissect the portfolio – did he buy a lot of small and midcap? what is his style? did he pick up a lot of value stocks which was languishing at the bottom when Amit started creating his portfolio? did he just go and copy what the bigger and more successful fund managers had done? Did he have his own philosophy or did he do what his group (IIT, IIM) think was good to do? How could Subhiksha go wrong with an IIT, IIM heading it? Did he actually do closet indexing (worst thing to do – too much fees for a lazy fund manager)…..soon the jury would rip Amit apart. He no longer looked like the venerable fund manager who created a 3.8% alpha. The analysis and the TRI (total return index) soon took away the sheen. The ‘alpha’ had become ‘beta’. The gap now came down to 0.9%. Not bad over a 20 year period, but surely not eye-popping. His own fund house was putting pressure on him to make way for the younger fund managers who were really performing better than his own flagship fund. Well, his trustee told me that he could move on and become a mentor for younger fund managers, but of course he would have to quit a job paying more than 1 Million US $.
Today analytical tools will also adjust the fund managers returns for riskiness, standard deviation (to get his return how many sleepless nights did you give us), closet indexing, market cap freedom, reacting quickly, portfolio turnover….and of course fees.
Very few fund managers look promising over the next 25 years. Forget what happened in the past. Start questioning the biggies. They are not as impressive as you think. Their past has been made to look great. It is not. Their future looks bleak. Stop falling for brands. Stop falling for Amc which are shrewd (not smart, but shrewd)….you may suddenly prefer indexing.
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