<p>Judge not lest ye be judged. An oft repeated phrase in moral and religious discourse, true for all aspects of personal dealings, not so much for the fraught relationship between investors and their fund managers. While managers are often pitching for increasing quantum of investment, investor’s refrain is to get high returns with minimal risk. Unfortunately, decisions are made based on near term performance as described by the fund house or a commission driven distributor with little or no thought to fit or risk. </p>.<p>Over the years (since the 1990’s with the advent of ETFs and Index Funds), there has been a debate on whether we need (active) funds or are passives (ETFs and Index Funds) sufficient to run all manner of portfolios?</p>.<p>Reality is while passives have gained significant ground, with net flows to ETF exceeding Mutual Funds worldwide, large swathes of investors are invested in actively managed funds. But, as last year’s SPIVA India report states, 86%+ of largecap managers underperformed the BSE100 index while just shy of 14% outperformed. It is therefore important to understand which of those 14% outperformers can one rely on and, which ones are a flash in the pan? </p>.<p>Most widespread practice is to look at a fund’s historical performance and the problem with such unidimensional analysis is it overlooks risk – how much of a gamble is the investment? and whether the alpha, returns in excess of market (Sensex, Nifty, or other relevant Index) is likely sustain going forward? Therefore, ideal metric is not 1/3/5-year gains but how consistently has the manager generated alpha by sticking to their style, following laid down processes, managing risk, sticking to mandated allocations, keeping costs and churn low. Morningstar and Lipper among others supply risk scores - especially useful for determining relative riskiness.</p>.<p>However, success can also be a problem as we have seen AMCs going as far as to stop inflows in certain funds as they become large and unwieldy. It would be prudent to research whether size may be an issue going forward? </p>.<p>While we want to examine “fund managers” with a microscope, they operate under the policies and principles set by fun houses or Asset Management Companies (AMC). AMCs determine what sort of guard rails exist to protect them and the investors, which products should exist, and which ones are shuttered or merged, how fee is charged and hiring talent. </p>.<p>For instance, if there are significant,<br />frequent scheme mergers or closures or even New Fund Offers, it implies shifting strategic intent where investors are left with investments they may not have signed up<br />for.</p>.<p>Sometimes, closures or halting transactions in inclement market conditions, however painful, might be a desirable action to preserve value.</p>.<p>Fund houses cannot be everything to everyone and must have a core competence. Conversely, multifarious schemes in an AMC will have CIOs struggling to deal with<br />sheer breadth of skills required to manage a multitude of funds. Houses with smaller number of schemes playing to their core strengths are better for efficient active management than an AMC with thousands of schemes.</p>.<p>Manager selection is key to a performing portfolio but, as Jack Bogle, the founder of Vanguard, put it: “The most fundamental decision of investing is the allocation of your assets: How much should you own in stocks? How much should you own in bonds? How much should you own in cash reserve?” - from there, selecting low cost, consistent performers or ETFs, those with low tracking errors will go a long way in long term, consistently performing investor portfolios. </p>.<p><strong>Watch the latest DH Videos here:</strong></p>
<p>Judge not lest ye be judged. An oft repeated phrase in moral and religious discourse, true for all aspects of personal dealings, not so much for the fraught relationship between investors and their fund managers. While managers are often pitching for increasing quantum of investment, investor’s refrain is to get high returns with minimal risk. Unfortunately, decisions are made based on near term performance as described by the fund house or a commission driven distributor with little or no thought to fit or risk. </p>.<p>Over the years (since the 1990’s with the advent of ETFs and Index Funds), there has been a debate on whether we need (active) funds or are passives (ETFs and Index Funds) sufficient to run all manner of portfolios?</p>.<p>Reality is while passives have gained significant ground, with net flows to ETF exceeding Mutual Funds worldwide, large swathes of investors are invested in actively managed funds. But, as last year’s SPIVA India report states, 86%+ of largecap managers underperformed the BSE100 index while just shy of 14% outperformed. It is therefore important to understand which of those 14% outperformers can one rely on and, which ones are a flash in the pan? </p>.<p>Most widespread practice is to look at a fund’s historical performance and the problem with such unidimensional analysis is it overlooks risk – how much of a gamble is the investment? and whether the alpha, returns in excess of market (Sensex, Nifty, or other relevant Index) is likely sustain going forward? Therefore, ideal metric is not 1/3/5-year gains but how consistently has the manager generated alpha by sticking to their style, following laid down processes, managing risk, sticking to mandated allocations, keeping costs and churn low. Morningstar and Lipper among others supply risk scores - especially useful for determining relative riskiness.</p>.<p>However, success can also be a problem as we have seen AMCs going as far as to stop inflows in certain funds as they become large and unwieldy. It would be prudent to research whether size may be an issue going forward? </p>.<p>While we want to examine “fund managers” with a microscope, they operate under the policies and principles set by fun houses or Asset Management Companies (AMC). AMCs determine what sort of guard rails exist to protect them and the investors, which products should exist, and which ones are shuttered or merged, how fee is charged and hiring talent. </p>.<p>For instance, if there are significant,<br />frequent scheme mergers or closures or even New Fund Offers, it implies shifting strategic intent where investors are left with investments they may not have signed up<br />for.</p>.<p>Sometimes, closures or halting transactions in inclement market conditions, however painful, might be a desirable action to preserve value.</p>.<p>Fund houses cannot be everything to everyone and must have a core competence. Conversely, multifarious schemes in an AMC will have CIOs struggling to deal with<br />sheer breadth of skills required to manage a multitude of funds. Houses with smaller number of schemes playing to their core strengths are better for efficient active management than an AMC with thousands of schemes.</p>.<p>Manager selection is key to a performing portfolio but, as Jack Bogle, the founder of Vanguard, put it: “The most fundamental decision of investing is the allocation of your assets: How much should you own in stocks? How much should you own in bonds? How much should you own in cash reserve?” - from there, selecting low cost, consistent performers or ETFs, those with low tracking errors will go a long way in long term, consistently performing investor portfolios. </p>.<p><strong>Watch the latest DH Videos here:</strong></p>