At the outset let me tell you that I do not think it is the job of an Advisor to create alpha. His job is to help the client write down his achievable goals, chart a plan and make sure that the investor sticks to the plan. Having said that in a competitive world where the investors and advisers are far from perfect there could be some investors and advisers who may expect the adviser to do so.
So, my blunt question is : Can an adviser be a multi asset, multi manager, long term wealth creator? and for this can he select the best (or among the best) funds on a consistent basis? I mean can he create persistency in a portfolio by selecting the best ALWAYS.
The answer is obviously no. Far more important it is not necessary, and perhaps not desirable – it is far more important that the client achieve his goals. Chasing performance is not necessary, stressful, and is just a chatting point among advisers. Mostly investors may not really be looking forward to this.
In a market where persistence does not exist, I ask advisers to defend their portfolios. I hear amazing stories, but I can’t see persistence. Franklin India Bluechip, Icici Pru discovery, Hdfc Prudence (old name) – all rockstars of the past are not exactly setting the Ganges on fire now. Even Hdfc Top 100 and Franklin Prima have had bad years, but a great long term performance record. If you see the US data, a lot of money is moving to Index funds, Etf, ‘rule based funds’, equal weighted index funds – you name it and you have somebody willing to experiment. Cost is an issue, but far more important fund manager’s choice of shares, persistence, logic, etc. is almost IMPOSSIBLE for the advisor to defend on a quarterly basis. IT IS not as though there are no Index crushing performance from fund managers, but it is almost impossible to find them in advance. If you are a cricket fan, look at IPL history. So many Indian kids came in with great performance. Many who were stars in 2010 may have even given up competitive cricket. Ditto fund managers. Go and select past data. A fund did extremely well in say 2010, 2012 and 2013 it was the TOPMOST fund. In 2014 you found it IMPOSSIBLE to keep it out of your portfolio. So you sold heavily from 2012 to 2018. Now in 2019 you find that the fund is almost RUBBISH. Terrible under-performance. However, you have to keep defending. You use words like “reversion to mean” but it does not cut ice. An upstart fund manager has beaten this “old bulging race horse” by 5% this year. That CEO says “you guys give a premium to “A” just because he is famous. My fund manager has created more wealth…”.
Funny – If somebody was to tell me that “Escorts growth fund” were to perform better than the best, CAN (or SHOULD) an adviser find enough courage to remove money from Prashant Jain, Ramdeo Aggarwal, Nippon, Franklin Templeton, Naren Sankaran…and put it in say Escorts?
There is zero upside for the adviser. The client will say “you did your job”. If it fails, he will get slammed. For the adviser it is a funny game. Heads he loses, Tails he loses. It is far better for the adviser to aim for the average – than look for that outlier – and have a significant stake in the outcome. Trying to be a “Manager of Managers” is not easy, and almost not desirable.
You can’t use previous track records to identify the winning or losing managers for the next period of time. There aren’t any performance indicators that a set of scores will follow. Imagine trying to predict the next 5 scores of Virat Kohli. It is not going to work -and far more importantly it is the stupidest way to select a team for the future matches! Do selectors try to do that? No. However, it is impossible to drop a good player in good form for any match. Ditto for the adviser. He does not have any software or related data points that will help him do this as a financial advisor. Morningstar can’t do it. Lipper can’t do it. I know top 3 fund managers who LAUGHED when I asked them if they could. One of them said maybe God can. I have not met Sachin Tendulkar, so I can’t comment!!!
We would all love to believe that a fund that has just beaten its peers for say X years (put any number 1, 3, 4, 11…) has a higher probability of doing so over the next few years, but statistically it’s just not true. Let us say Mr. N the fund manager got serious alpha in his large cap fund over the past 5 years. Let us say he created a rule saying “I will stay away from PSU shares”. It helped him say till 2017. Then in 2018 he realized that he missed out on some amazing stories like Bpcl, Power finance corporation, REC etc. He also realizes that he got saved from Bhel, Gail, Ntpc etc. HOWEVER, he is ROASTED in public for missing out the “OBVIOUS” in hindsight! So he changes strategy and in 2018, 2019 his performance is shitty.
Will you now allocate to this fund manager? That is the adviser’s dilemma.
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