A fund manager's dilemma

Dear mom,

I am writing because I may need another job.

I may need another job not because equity investing is out of fashion.

I may need another job precisely because the markets are doing better than ever, mutual fund (MF) inflows have climbed to a new high and there is a greater need for fund managers with every passing day.

The reason why I wish to quit, or let me replace this with a less dramatic ‘I need a sabbatical’, is that I am passing through an ethical challenge. I succeeded over the years because I worked with a clear definition of value: If something was below a P/E (price-to-earnings) of five based on current year earnings, then it was considered safe to buy. My success was based on the ability to narrow my decision to a specific kind of company available at a nascent point in its growth phase around a relatively low PE, an approach that generally worked.

Something happened in the third quarter of the last financial year that transformed everything. Demonetisation transformed equity investing into a broader public movement; more people moved their cash to mainstream equity investing inspired by no tax on long-term capital gains, coupled with the advantage of directly playing the India growth story.

The result: Recent MF inflows through the SIP route have been staggering. If I had been a portfolio manager, I could have selected to stay in cash validated by experience and logic; because I am an MF executive with a mandate to immediately invest in equities, my job is to invest regardless of valuations. 

These then are my challenges: Equities are not cheap; I need to buy at levels I am not comfortable with; I need to ‘create’ a rationale about some stocks we are buying into; we have no clue about the prospective earnings of sectors or companies; most of our ‘buy’ reports are based on a nebulous understanding of the future; on most occasions the profits we project do not materialise.

I am also evolving from a low-PE DNA to a mid-to-high PE pedigree. I am compromising what I held as sacred; for years, the eleventh commandment was Thou shalt not over-pay, whereas now I am re-inscribing the tablet with Thou shalt not question.

The result is that even as much of my work appears to be brilliant in a bull market, the reality is that I have done little except to stay put on the ship, which is the basis for more money to come in, making the well-process increasingly expensive, which yet again makes my work appear perpetually outstanding. I am collecting bonus after bonus whereas the real ‘hero’ of this short-term outperformance is the investor providing unprecedented quantities of long-term capital.

My training dictates that I cash my holdings; the fund stipulates that I stay invested and create bigger stories that bring in more cash.

If I can’t exit my investments, then it might be better to exit the game itself.

I thought I would tell you what’s going through my mind.

Your ever-questioning daughter.
 

The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where markets are not headed