Portfolio Yoga Monthly Newsletter May 2021
What makes a Great Fund Manager?.
How to spot a good fund manager was a question asked at a Twitter Spaces event. This was a question that Swarup Mohanty answered. I wish I could understand the answer he gave, but I don’t know Oriya :). What I could understand about the answer he gave was to forget about Fund Managers and focus on the Advisor.
If you were to dig down the reasons , the answer appears simple. Recognition for a fund manager has less to do with his philosophy. Or how erudite he is but more to do with his or her past returns. Period.
Beating the market is the prime criteria to be get judged by history as a great fund manager. The moment you stop beating, critics latch on to you. So, Warren Buffett with one of the longest period of performance has become a good guy to hit at.
Dave Portnoy called him a washed up Investor. But this is not a fringe opinion (Dave Portnoy for instance has 2.5 Million followers on Twitter). The worst performing Indian mutual fund outperformed Warren Buffett in dollar terms by over four times in the past 17 years remarked Nilesh Shah a while back.
An old saying suggests that a movie star is as good as his last few pictures. This is something that is applicable from Sports to Movies to Markets. You are only as good as your last trade.
Last year we saw some interesting funds register astonishing returns. Quant Small Cap fund for instance has a one year return of 200%+. The funds asset under management today is low (268 Crores). It should be interesting to observe how their AUM moves if they can deliver good performance. Even if they aren’t able to repeat the blockbuster performance of 2020 – 21, process is the key.
The current hot fund manager of the moment is Rajeev Thakkar. PPFAS has been consistent in both process and returns for a long time now. Their fame though has shot up in recent times. The 10-year track record of PPFAS Long Term Equity Fund is now the best among all multi-cap funds.
In 2018, I attended the Morningstar Investment Conference in Mumbai. While a lot of unknown but famous RIA’s got mobbed around during the session breaks, Rajeev was standing with a colleague of his at the corner with none to hound.
Despite being an introvert, I introduced myself and had a couple of minutes of general talk with him. Today I am sure he will get surrounded by investors who wish to know what the future of the market is. Whether investing in the US which is one of the current rages, will continue to hold or not for example.
Business Channels love speaking to fund managers but unfortunately big mutual fund managers are generally very busy to give them the bites they are looking for. We have a good ecosystem of Portfolio Managers who most of the time wear the cap of not just the Chief Investment Officer but the Chief Marketing Officer willing to spare time as often as possible.
But with 350+ portfolio management firms and around 500 managers, you have plenty of options. Business Channels love hedgehogs more than the foxes (Link if you are wondering what is the connection between the two).
Business Channels love fund managers whose strategy is not only hot at the moment but where the fund manager has the ability to mesmerize their viewers. Interviews are generally softball questions with any data that points out to the silliness getting rejected without a second thought.
The moment that trend fades away, the channels have no qualms about dropping him like a hot potato and moving from a fund manager who loves shitty companies to a fund manager who thinks investing in quality regardless of valuation as the way to go.
As an investor, your best returns are when the fund manager is unknown. When Peter Lynch took over the Fidelity Magellan fund, he was an unknown manager who got entrusted with a 20 million dollar close ended fund.
By the end of 5 years though he had shown his mettle with his CAGR return being 35% vs the S&P 500’s return for the same period of 2.70%. The fund was then opened to fresh subscriptions and over time the AUM soared to the extent that when he finally exited in 1990, the AUM was to the tune of 20 Billion.
The performance for the years when it was open is a CAGR of 21.80% versus market return of 11.70%. A hefty outperformance indeed but not as much as his first few years. This is true for almost every fund manager out there – the bane of a successful fund manager it seems is he getting discovered by the masses.
But how do you go about finding those successful diamonds when they are still pretty much rough and undiscovered. Compared to the past, today fund managers are way better prepared when it comes to communication skills to the extent that talking to the fund manager can be a misrepresentation of who he really is.
In markets tops are tough to predict, predicting bottoms are a lot easier. This is because while the market can be irrational when it comes to how high it can go, it’s not that irrational to keep going lower and the bottom is closer than what many actually fear.
When it comes to fund managers, it’s easier to know who will not be the best of the performers for the future. But way tougher to catch the best performer of the future before they became the best.
If you have invested in a fund manager who today is hot, would that mean its better to exit the fund. While my guess is as good as yours, hot fund managers future returns generally are not be like the past. This is more evident if the fund added dollops of new assets under management.
Cathie Wood has a wonderful long term track record. But only in recent months that she came to become the messiah of the masses. Be it Crypto, Tesla and other hot stocks, she is the go to fund manager.
Assets under Management spiraled higher. This created a need for to her to chase stocks at prices she may in the past may not have been comfortable with. Since February of this year, the fund is down 30%. To give a perspective – the fund faced a 42% draw-down during the market meltdown of March 2020).
Nothing destroys returns like amassing of assets.
This has been true for both fund managers and advisors. In a way, it’s a dilemma for if you become too famous, you end up with substandard returns for your clients. But if you don’t become famous, does the world even care about the returns you generated for your clients?
This month I had a talk with good friends Anish Teli and Pravin Palande on the topic of Tail Risk Investment. You can watch it here
The hot topic for the month has to be Crypto and the volatility we saw there. What I learned recently was that Crypto has 1.5 Crore traders . This is huge given that this compares to around 3 Crore Individual Mutual Fund investors. Then again, the number could be a hyperbole for I am not sure if there is a trustable source.
I have been a listener at a Club House discussion on Crypto vs Stocks and what is astonishing was that even though some of the speakers are well versed in Crypto, there is still confusion on what Bitcoin actually represents. Is it a Currency, Is it an Asset, Is it a transitory investment.
In a Club House meet where I was a speaker, we wondered about whether investing in Bitcoin type of assets will qualify as a tail risk investment. Currently investing in Crypto is hard compared to Equity investing. A firm in the US seems to want to make it easy by having a Bitcoin ETF and since Elon’s tweet about Energy Consumption being negative, this will be ESG certified as well.
While I may not invest in a crypto asset, ESG or not, what is interesting is how the purely belief holds up the system – belief in the bigger fool theory.
An investor who is buying a Dogecoin is not buying because he thinks it’s a good investment to own that will generate cash flows but because he believes that some time down the road he will find someone who will pay him more versus what he himself paid for it.
In 1996, Alan Greenspan coined the term Irrational exuberance. Nasdaq was at 1300. Nasdaq peaked in 2000 at 5140. While it did come back to 1300 twice (once in 2002 and once in 2009), it’s hard to say that he was right in calling the bubble. He was way too early and anyone who sold on his call did not get a chance to buy at much lower prices.
I don’t know how Bitcoin or any of the other coins will move but they seem sure to stay around us for a long time to come.
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