Selection Bias in Mutual Fund

When we are told that Mutual Funds beat Benchmark & hence generate Alpha, we are given the list of funds that have achieved that landmark. What we aren’t shown is the list of funds that have under-performed (who wants to highlight losers anyway) as also how 2 similar funds managed by a single fund house can have returns that are hugely diversionary

The rationale for this post comes from this tweet by Manoj Nagpal (tweet). The fact that despite trading under the same fund house (and hence similar philosophy), the returns are dramatically different

Here are the returns and comparison to the benchmark via ValueResearchOnline

(Link to above Fund)

And here is the table for the Second fund

(Link to the above Fund)

So, what is the difference in the funds that could be the reason for such a wide parity. The difference comes in who is managing the funds.

Fund-1 is managed by Star fund manager Kenneth Andrade while Fund -3 (the Second fund above) is managed by Ankur Arora & Meenakshi Dawar.

In a way, the whole Alpha of the fund seems to be credited to the one guy and not exactly because of fund philosophy or any other nonsense that is generally seen as key factors and that brings us to another question as to what does one do when the key player quits (as is being rumored in case of Kenneth) or unfortunately dies as in case of Parag Parikh.

In case of Parag, my own rationale (which seemed to be different from what most other financial advisors were saying) was that it made a lot of sense to exit the fund for now and wait to see how the fund performs in the future.

Kenneth Andrade, Prashant Jain are among the few widely known fund managers who have been drivers of not just their funds but also have made it possible for people to experience what long term compounding can achieve.

There is a huge amount of literature out there since Internationally, a star fund manager leaving for fresh pastures happens all the time. Here are a few of them

Star fund manager quits – what should investors do? (The Telegraph)

Should You Sell a Fund When the Star Manager Leaves? (Morningstar)

Don’t jump ship after star managers quit (FT)

Reach for the stars? (SquareSpace)

While the jury is still out there, I believe in that one should look at safety first and in that, it makes a lot more sense to exit a fund when the Star Manager quits rather than hoping the the next one in line is as good as the former. After all, its our money at risk.