Last month, the analysts' team at my organisation conducted an exercise to identify the fund managers with the best long-term track records. But this study, which was done for a major business magazine, had to be abandoned because there were very few fund managers who had managed the same fund for any appreciable length of time.
Fund managers in India routinely change jobs. The general idea seems to be that continuity of fund management does not matter. Fund company CEOs lend a lot of weight to 'the process' being more important than the person.
This sounds like such a perfect copybook 'good management' statement that one tends to accept it without too much critical examination. In fact, in the past, we at Value Research have ourselves taken such statements at face value and said investors should be wary but not really get too worried when the fund manager leaves.
That's generally true but there's a nuance to it. While the departure of most fund managers doesn't matter, some of the best long-term performance comes from fund managers who've been with the same funds for a long time. This is not rigorously provable, but a careful look at some Asset Management Companies confirms it. Prominent examples are HDFC (previously Zurich funds), Reliance and Franklin Templeton.
However, one has to be careful not to confuse cause and effect here. I'm not suggesting even for a moment that just sticking around can create a good fund manager.
What I'm saying is that, despite all the 'process-driven' happy talk spouted by AMCs which don't have stable and/ or good fund managers, fund management is a business in which people matter. Finding and retaining good fund managers is a crucial part of running an AMC.
Why is this so? Why can't 'process', which is an idea so close to the heart of modern management, substitute for whatever secret sauce it is that good fund managers have? The answer is that it can't. There are some activities that are built on a foundation of process but also require instinct, creativity, experience, talent, gut feel, a nose for smelling a good opportunity and other things which no amount of process can substitute. Such activities are characterised by the size of the gap between performances that are good, as against performances that are merely average.
Clearly, managing equity investing over a long-term is one such activity. Over periods like five to 10 years, the best fund managers increase your money not just a little bit more than the average ones, but many, many times more. This takes more than 'process' (or even worse, 'due process'). It takes actual talent. And mind you, blind luck is a good replacement for talent only in the short-term and, even then, mostly during bull-runs.
Process alone is sufficient for things like sending account statements, not actual fund management.
So, when you choose a fund as an investor, you need to focus on the right factors. See how well your fund manager is performing vis-a-vis other fund managers. Look at the other funds he is managing. If he is new, find out which funds he has managed in other fund houses and see how they are performing.
The main reason for investing in a mutual fund is that the fund manager makes better investment decisions than most of us can do individually. So, when you put your money into a fund, you are basically trying to hire a good fund manager. After that, keep a tab on him.
The author is the CEO of Value Research, a mutual fund research organisation.
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