Fund house or fund manager?

Both are important. But a good fund manager is more important.

The mutual fund (MF) sector has come a long way. In 1987, the doors were first thrown open for entry of the first non-UTI mutual fund. During those early days, only the public sector was allowed to operate MFs.

Then, in 1993 (a watershed year for MFs), private sector mutual funds made their appearance. Kothari Pioneer (now merged with Franklin Templeton) was the first in India. In a relatively short span, the assets under MF management have grown phenomenally to around Rs 7.5 lakh crore. But it is still only the tip of the iceberg; the bulk of Indian savings are parked in bank deposits. But, over time, as investors gradually discover it is indeed the instrument of an MF that is the ideal vehicle to build one’s capital over a period of time, the figure will increase manifold.

 

That said, it is strange that one needs qualifications to distribute (sell) funds, there are none needed to manage these! One would think that if distributing funds is a responsible task, managing the distributed funds would be more so. Currently, anyone can be a fund manager regardless of their qualifications.

Basically, the issue thrown up is, how important is the role of the fund manager in the overall scheme? Are qualifications and credentials of an individual more critical or are the systems, processes and risk management strategies put into place by the MF that employs him? Does the fund manager’s investment style take precedence over the fund’s investment process or is it the other way around?

MANAGER VERSUS HOUSE
There is no plain yes or no answer and it depends upon the fund and its philosophy. When you invest, you are implicitly reposing a certain amount of trust into the fund manager’s expertise and capability. You are essentially hiring a professional to manage your money and pick your stocks and because of the cost sharing with thousands of others, the professional expertise comes at an economical price.

Conventional logic would say it is the ability and the skill of this professional, the fund manager, that should generate the returns. However, is it always so? Investing thousands of crores belonging to hundreds of thousands of investors is clearly not a one-man job. What’s more, now even the international markets are being opened for domestic mutual funds.

Typically, MFs are usually managed by a team of managers, backed up by analysts and researchers. Just like a captain is as good as his team, without able support, no matter how skilled a fund manager is, he will not be able to deliver optimally.

Second, it also depends upon the type of fund under management. A passive fund, such as an index fund that mirrors a certain benchmark, does not require the active intervention of a fund manager. Similarly, a quant or an arbitrage scheme, where the mandate of the fund is mechanical and pre-defined and not dependent upon individual calls, requires more of software, systems and IT support, rather than fund management expertise.

The other factor one has to consider is the management philosophy of the fund house -- whether process-driven or one that provides fund managers latitude and flexibility. Some houses give a fair amount of autonomy to the fund manager in taking large sectoral calls, churning the portfolio or even investing in small caps or unlisted companies, subject of course to Sebi regulations. On the other hand, there are fund houses that follow a strong, process-driven investment style and the fund manager’s role is to perform within the parameters defined by the institution.

TAKING A CALL
So, how does an investor determine whether the performance of his MF investment is the result of an individual’s brilliance or organisational processes? Well, it is the consistency of a fund’s performance that is the litmus test. Examined over time, it would be evident how the MF has performed across bull and bear phases and under different managers. Take SBI MF. Sometime in 2007, their star fund manager left for greener pastures. However, the performance of schemes such as Magnum Contra or Magnum Global hasn’t been majorly affected. However, the same cannot be said about some other schemes.

All said, at the end of the day, successful fund management would in all probability be a combination of both styles. Yes, processes need to be in place, but one has to admit the very activity of stock selection is a matter of experience, perspective and instinct. These are human qualities that cannot be completely reduced to a process. To put it differently, the buck stops with the fund manager. After all, there is a reason why a ship has one master, a team has one captain and an army has one commander. The person at the helm is the one who provides the vision, guidance and leadership.

There has to be some sort of guidelines (work experience, certified training, etc) will ensure homogeneity in the credentials of a fund manager. The argument of the institutional process versus an individual may still continue, but if a common certified qualification means an assurance to the investor that his money is in good hands, the effort will be worth all the trouble.

The writer is Director, Wonderland Consultants