Quantum Long Term | Portfolio Yoga

Some thoughts on “Do it yourself Investing”

Mahesh had an interesting question he posed

https://twitter.com/invest_mutual/status/1481845647213207560

The replies are interesting and many on the dot. But first let’s look at the performance (10 years I assume is a good start)

I am using the Nifty 100 Index not the TRI since even an index fund cannot match the TRI and there is no way to replicate that performance.

Standalone, the performance of the fund isn’t too bad. Yes, there are other funds that have done better, but could one have forecasted that in 2012? If not, the only alternative to consider is the Index since that constitutes the real opportunity cost.

But what if you looked at rolling returns, how does Quantum fare against the Index. Since anything less than 5 years could be random, I am using a 5 year rolling return chart.

For most of the time, the 5 year rolling returns were actually higher than the Index. It’s only if one had invested 5 years back would he see a pretty large divergence.

But despite the performance, the AUM did not pick up steam. 6 years back (the earliest data I could get), the AUM for the fund was 416 Crores. It has grown but not that much. Today new funds are able to raise multiples of that without even a track record.

But this underperformance may not be the new normal. Then again, who really knows how the future shall pan out.

Dev of Stable Investor had a poll running where he asked a simple question – Do you have a financial advisor

Do you have an investment advisor / financial planner you pay fees (not commissions) to?
— Stable Investor (@StableInvestor) January 13, 2022

80% don’t have one with while 7% believe they require but are for now happy with doing things on their own.

The amount of information that is available to a new investor today is exponentially more than what was ever available and a lot of this is actually free. I for instance subscribe to 100+ substacks many of which have amazing depth of reasoning and yet are delivered free.

I also these days am buying a lot of books, maybe more than what I should but when I look at the total spend, it’s actually less than what many a well known advisor would charge for a year’ subscription. In a way, I feel justified in the expense.

Then there is twitter. The amount of information shared freely is just unimaginable. There are biases of course, but that is par for the course regardless of whether the advice was freely delivered or paid. Look at this tread on Pitti Laminations

https://twitter.com/sanjaylangval/status/1481974486941540359

I don’t think there is at any point in the past an equivalent to this. During the dot com bubble time, Bangalore Stock Exchange was a hive of activity. One trend that caught the imagination of a lot of traders were pivot levels (Link if you are new to that).

These despite being so easy to calculate were sold for humongous prices. The buyers once they purchased this would keep this in the pocket taking a peek once in a while like an exam student trying to cheat by looking at his chits he has carried from home.

The current craze for the Do-it-yourself investors are small cases which makes it easy to replicate a portfolio. With markets on a one way run, investors are lapping up new products introduced by well known advisors. But do the returns really justify the time and efforts involved.

Momentum portfolios have such a run that Mutual Funds are now getting into the game. Recently UTI came up with a NFO followed by Kotak and now Motilal Oswal. Then again, Momentum is in the hot seat as of now. Nifty Alpha 50 has risen nearly 200% since January 2020. The question whether replication is easy or not I best leave it to the experts.

One of the perks of being in the business of stock broking for a long time is the ability to interact with an enormous number of Do it yourself investors and traders – this even before DIY became as famous as it is now.

But it also provides a perspective. Most do it yourself investors and traders don’t make money, worse many lose multiple times what they came out to achieve. Yet, the spirit of adventure and the fact that the few who succeed make it seem like it’s within reach push even those who aren’t ready to invest themselves to try their hand.

When things don’t work out one can see the frustration in trying to pass the blame – from the stock broker to the exchange to SEBI, whoever one feels could have helped him realize his dream that is now long gone.

Doing it yourself is similar to the last voyage Henry Worsley took.

You might enjoy this too –https://t.co/BMyWsMq15y
— Prashant Nair (@_prashantnair) January 13, 2022

Even with his deep experience and knowledge, his final mission ended in a disaster. I have in my career come close to dropping into a crevice never to recover and have seen unpteen disasters of others (friends, acquaintances). The success stories get hyped up while the failures are brushed under the carpet.

It’s okay to do all by one-self but if you feel you need help, its okay to connect with a advisor – preferably a fee only advisor so that when you need his help, you can reach out to him and get a different view of the issue at hand and one you already have a view upon.

Henry Worsley called upon the world’s most expensive taxi maybe a bit too late, but that was still better than being stuck with no options to exit even at a price.

Let me leave you with a dialogue from one of my favorite movies

Ruffling Feathers – the Ajit Dayal Interview

Most mutual fund distributors that I have come across online (I have been used to invested direct even before Direct was a option, so no offline distributor friends) rarely talk about a fund that has in its category been the best across 10 years and for good reason. This was a fund that until recently decided to ignore distributors, the champions of the Mutual Fund Industry and tried to touch base directly with the Investor.

For the trouble the investor took to invest on his own, the fund ensured that they charged the lowest fee (this before the onset of Direct) since no commissions needed to be paid to anyone.

The low fee structure has also meant a lower salary base for fund managers. While top fund managers of other funds earn Salaries of Crores (+ Stock Options which aren’t disclosed), the Salary of Atul Kumar, head of Equities at Quantum for instance is one of the lowest among Mutual Fund Managers with AUM > 500 Crores.

Last week fund investors received a letter bidding adieu from the founder, Ajit Dayal and suffice to say, other than those invested, don’t think anyone barely gave it a thought. But on September 1, ET published a Interview with him, where he called out the fund industry on the question of Integrity.

No one likes their Integrity questioned and least of all fund managers who believe they have done yeoman service to investors who have been able to get better returns even after paying a much heftier fee and in a way, they are right.

What Ajit Dayal set out to do when he started Quantum was similar in thought of what John Bogle tried with Vanguard or what Eon Musk is trying out with Tesla (Selling Direct to consumer to eliminate costs). As Robert Frost wrote in his splendid poem, “The Road not Taken”

I took the one less traveled by,
And that has made all the difference.

Quantum took a path that differed from what the rest of the Industry had taken. But taking a different road in itself doesn’t lead to success. To call those who didn’t take a similar path of dishonesty is asking for trouble. After all, unlike say Vanguard which has proven over time that Index Funds / ETF’s are the best instrument, Quantum hasn’t been able to sell as to why one should invest in its fund versus other funds which have given better returns post higher expense ratio’s.

A key reason given out by Quantum as to why it avoided Distributors is lack of transparency. But that could have easily solved by showcasing the commission that is given to the distributor as its now compulsory rather than eliminate the distributor completely.

Another class of people who are looked at with scorn are Stock Brokers .While there have been many Stock Brokers who have cheated their clients, not everyone is or was a cheat (Disclaimer: I am a Sub-Broker). Every Industry has its share of black sheep, but to call the entire herd black is stretching one’s own credibility.

Mutual funds on a whole manage around 6.3 Lakh Crores in Equity alone. Of this Quantum manages around 1000 Crores or 0.16%. Its way stretched to think that Industry could get here by just mis-selling to retail investors.

Mutual fund industry under pressure from SEBI started with Direct funds around 5 years back. Yet, the amount that comes through Direct is minuscule. The simplest explanation for this would be that the guys who are selling regular – Distributors / Financial Planners are providing some value which makes the end investor appreciate and willing to pay (in-directly of course) for the services rendered.

As I have written many a time, lower the fees, better the returns on the longer term. But if you have no clue about finance and aren’t willing to learn, it could turn out to be far cheaper to pay a advisor than try to do in oneself.

Quantum was a nice experiment and if they continue to adhere to their beliefs I do think they can make it big. Their Long Term Equity fund became the Best performing fund among Large Caps in October 2016, a position that they continue to hold.

Finally, its all about returns over the long term that matters. As long as the are able to achieve that, my money will prefer them over others. Ajit Dayal deserves praise for starting something different, yet he is as human and fallible as the rest of us. So, thank you Sir for the venture and Best of Luck for future endeavors.

Those who really deserve praise are the people who, while human enough to enjoy power, nevertheless pay more attention to justice than they are compelled to do by their situation. – Thucyclides

Read the full interview here: We have done all that we said we would do: Ajit Dayal

When founders Quit, does Philosophy change?

I have been a follower as well as investor in Quantum Mutual Fund and also a big admirer of their philosophy. While their fund, Quantum Long Term Equity was launched in 2006, unlike many, I came across them fairly recently (2012).

The key reason for me to like their fund was their philosophy of lower fees and willingness to go to cash when markets felt over-heated. While they remained one of the cheapest equity funds to invest for a long time, the same isn’t true now with mutual fund fees falling dramatically in recent times.

Yesterday, the man who started it all “Ajit Dayal” sent a letter bidding adieu to investors in the fund. This was very surprising given that founders do not generally exit the company without a period of transition and even then, generally tend to stay around for long to ensure continuity.

While returns are key, one of the reasons funds like Quantum have been able to garner assets is because of investors belief in the philosophy they claim to uphold. While Quantum sits on top of the ranking list (on ValueResarch) categorized as it is under Large Cap, that doesn’t really provide the true picture since just a few years back, it was categorized (based on their portfolio) as a Multi Cap Fund.

When a Star fund manager / founder exits the fund / firm, the key question that needs to be asked is, should one continue to stay with the fund. Most fund houses ensure that the logic / philosophy that is the core of the fund is ingrained that ensures continuity regardless of presence or not of the guys who build those philosophies in the first place.

As investors, when we invest in a fund, we are outsourcing the whole fund selection and investment process to some one we trust. The bigger the investment, greater the trust factor. But when key people quit without sufficient reason or warning, it puts us in a quandary about whether we should stay with those who remain at the firm or move.

Moves such as these reinforce my view that rather than be dependent on fund managers, one should develop the expertise necessary to invest directly in the markets. If that is not possible, the best alternative is to invest in Index Funds / Exchange Traded Funds.

The risk of investing in Index is that while we are basing our investment in a mutual fund on the capability of the fund manager in question, here we are trusting that the Index Selection process has a sound logic that can survive and thrive over time.

The key to returns is concentration and this is more so important in mutual funds where investing in too many funds will only mean fodder for everyone else while you get returns lower than what even the Index could have easily delivered. But when changes such as this happens, its time to step back and think deep and hard as to why you were invested in the fund in the first place and whether the logic continues to remain true – change of management not withstanding.

Personally, the family investments we have in Quantum will stay for now though I am not too enthused to invest afresh at this point of time.

Chasing Performance & Behavior Gap

When Gold, especially in form of Jewelry is bought, its not bought by calculating the CAGR returns it shall provide over the next 3 / 5 years. When one buys a home for his own use, he is not calculating how many times it can become in the next few decades. But not calculating really mean that we are ignorant of returns?

Every month hundreds of vehicles are sold despite irrefutable evidence of how by just a few years it will be worth closer to scrap than any vehicle. Aren’t the buyers conscious of this fact?

Value Investors claim to buy good business choosing only businesses that keeps generating consistent returns for their shareholders. But do all good businesses make for good investments?

From the religion we profess to the acts we commit, everything is based on a some philosophy we agree with and one we would like to follow. Investing should be no different, or is it?

Last weekend, I raised a question on Twitter as to what drives Investors when it comes to Mutual Funds. The results were a tad of a surprise to me.

What is your Primary Criteria when investing in a Mutual Fund / PMS?

— Prashanth (@Prashanth_Krish) August 5, 2017

Returns are important and the very reason we finally invest, but Returns are post-ante – something we really have no control with. What we have control over a larger degree is the Philosophy that is followed by the fund house and how well we believe in them.

The reason for a investor to bet on a Philosophy than a Star Fund Manager or even Returns is that without there being stead fast belief, one can never be comfortable as to whether the fund continues to remain one that is worth staying invested or one from which it makes sense to move on.

In the 2000 bull market, one person who stayed away from Participation was Warren Buffett. For a time, he was heavily wrong as market broke every rule that seemed to bind it in the past as a new set of investors made bets that paid off immensely.

Such was the divergence that when the Nasdaq Composite was touching new all time highs, the Dow was a very close to its own All time High, the stock price of Berkshire Hathway was down 50% from its peak.

Rare would be the man who held Berkshire Hathway shares in those days while ignoring the hot stocks that had turned ordinary Joe’s into multi millionaires. “GREEN LIGHTS” Business Week proclaimed. “The stock market’s rise is a accurate reflection of the growing strength of the new economy. Productivity growth, although understated by official statistics, is raising as companies learn to use technology to cut costs, a necessity for competing in global markets”. (Quote sourced from the book, Bull: A History of the Boom & Bust, 1982 – 2004).

Its one thing to believe in a philosophy and quite another to be able to take the hits that come along with it. As Momentum Traders, we Invest / Trade without bothering about the companies in which we put our monies to work. The philosophy that guides us is historical evidence of cycles and belief that as long as we are trading with the larger trend, we shall come out better than where we started from.

From the outside, all Mutual Funds are the same – all of them try to gather as much of assets as possible and try to maximize gains for their investors, or are they different animals?

The last one year has been phenomenal in the markets with Nifty 50 up by 17.72% and Nifty Next 50 up 27.00%. Based on above data points, would you invest in a fund that has under-performed both the Indices with its 1 Year Return being just 15.39%. What about another fund that benchmarks itself to Nifty 500 which over the last one year has been up 17.30% verus 21% return by the Benchmark it follows?

The fund that is up 17.72% is Quantum Long Term Equity Plan while the fund that generated 17.30% return is Parag Parikh Long Term Value Fund.

The Behavior Gap

In 2012, Carl Richards a Certified Financial Planner came out with a book titled – The Behavior Gap – Simple ways to Stop Doing Dumb things with Money wherein he coined the term, “behavior gap” to explain the reason as to why Investors in Mutual Funds under-perform the funds they are invested into.

Behavioral Gap is not academic. As the following chart from Axis Mutual Fund shows, this is as real as it comes.

As can be seen, the difference can be substantial but without understanding the source of where this gap comes from, its easy to fall prey.

Momentum Chasing is Bad

Being a Momentum Trader, this is a tough to say but true when it comes to Mutual Funds. Chasing Momentum can easily land you in trouble for unlike stocks where Momentum Investing has great value, in funds, this can easily backfire.

Currently the best performing fund among Large Caps is the JM Core 11 fund (Best performing fund based on 3 year look back) and yet its AUM is just 32 Crores. The reason is not hard to fathom if one were to look at the performance of its funds with a longer track record. JM Equity Fund for example is the worst performing fund over the last 10 years (Large Cap) with return on Investment being a pitiable 4.03%. These days, you can get better return on Investment than that on your Saving Account.

Every fund worth its name claims to have a philosophy that is said to ensure better returns for its investors. Its quite another matter as to how many funds really follow what they preach.

Motilal Oswal Mutual Fund has a Philosophy of “Buy Right, Sit Tight”. Motilal Oswal MOSt Focused 25 Fund is the 3rd best fund among all Large Caps. Their 3 year return has been 19.75% but is the Return based on following of the Principal they profess?

The fund has a Turnover of 86% which seems to suggest that the Portfolio is going through a lot of churn. With markets flying, this is providing returns better than average, but what when the Tide goes down?

A competing fund (Large Cap focused with similar AUM) one of whose core philosophy has been to keeping costs as low as possible has generated a return of 13.75% over the same period. Turnover of the fund – 20%.

Does the above example mean that Higher Turnover is better or should one care less about Turnover as long as Results are above expectations?

While there is data lacking to reveal whether a higher turnover is better or worse, the following is evidence from United States where one has more data points to get a better perspective

Source: The Perils of Portfolio Turnover by David Blanchett.

One of the under-performing funds these days is Parag Parikh Long Term Value Fund. This fund philosophy is simply to Buy and Hold for the long term stocks that they believe are Value (Buying securities at a discount to intrinsic value). The fund has a Turnover Ratio of just 10% but a 3 year return of just 14.73% versus the best fund among Multicap funds – Franklin India High Growth Companies Fund which has given a return of 20.63% (Turnover Ratio being 44%).

Once again, the fund house in question has a philosophy of investing across Value and Growth and for now seems to have delivered way better than pure Value fund. But is this is a good model for eternity?

The Prime Objective for investing in Mutual Funds is the ability to hire a fund manager who believes in values we understand are willing to bet upon. Comparing one fund to another purely based on short term returns hence makes little sense and yet going by the Inflow / Outflow Mutual Funds data shows, this is what is happening with Investors chasing the best funds of the day.

Momentum Investing in Stocks on the other hand actually offers better Risk to Return as the upside is unlimited versus limited upside for even the best of funds. Strategies that work in one market needn’t really work in another and trying to force it can only result in broken goals and un-necessary disappointment .

“All I want to know is where I’m going to die so I’ll never go there.” – Anonymous

Of Labels and Stereotypes

Like it or not, we are all labelled one way or the other – from the Religion we profess to the Country in which we happen to be born among many others. For South Indians, anyone born in the North is a Bihari regardless of whether he is from Bihar or from Rajasthan. In the inverse, anyone south of the Vindyas is regarded as a Madarassi once again overlooking the vastness of the land that is there.

In Investments, we are believers in labels. We can either be Value Investors / Momentum Traders depending on which way the wind is blowing though there are guys (including me) who are die-hard fans of one style versus the other and would rather defend to death our ideology than just be open to whatever works.

Whatever Works. Isn’t that the key?

Chris Gayle you may claim has no style when you compare him to say Rahul Dravid. But in the format of 20-20, the key wasn’t whether he had style or not. It was whether he delivered. Its as simple as that.

In the Universe of Mutual Funds, funds are labelled according to their Portfolio into either Large Cap / Multi-Cap / Mid Cap and the Small Cap Universe. But these labels aren’t permanent for as the portfolio changes shape, so do the labels.

Quantum Long Term fund for example was long labelled as a Multi Cap fund but now is seen and categorized as a Large Cap fund. The fund is currently the best performing fund among Large Caps with a 10 year return of 14.63%. But what if the fund was not labelled and was compared with every other fund with a 10 year track record. Would it still be the leader?

14.63% Compounded Growth over 10 years is no small return and yet it would be placed in the 18th position among all funds (Excluding Sector Funds). Wait a minute you would say, aren’t we ignoring the Risk of these funds verus the lower risk of Quantum?

Thankfully we don’t need to speculate for we have data. For this exercise, I select 2 other funds. The first is IDFC Premier Equity Fund which is the best fund among all Equity Funds over the last 10 years. The second fund is ICICI Prudential Value Discovery Fund, the best fund among “MultiCap” funds of the last 10 years.

Since a picture says a thousand words, here is a chart showcasing the draw-downs suffered by these funds against one another.

Absent labels, could you really identify which fund is a Large Cap Fund, which one is a Mid Cap fund and which one is a Multi Cap one?

When shit hits the fan so as to speak, there isn’t much difference between a good mid cap stock and a great large cap one. Every starts to behave like a small cap and the above chart is just showcasing how close they are when it comes to risks taken.

Now, lets look at the cumulative returns (2006 to date) generated by these funds,

At no point of time has IDFC been even challenged in terms of leadership in returns. Quantum and ICICI were competing with each other before ICICI took off in the “Modi Magic” bull market with Quantum constrained to play catch up.

If I were to have not given you knowledge of the fund names or the labels they carry, which one would you go out and invest today?

Parag Parikh Mutual Fund was launched as a kind of Value Fund. But since fund research houses don’t have a label for Value, its closeted with other Multi Cap fund. The fund is really unique in many ways. For instance its well known exposure to stocks listed in US to the extent that its biggest holding is Alphabet Inc (Google).

Recent portfolio also shows its into Arbitrage (Futures versus Cash) with nearly 8% of the portfolio being totally hedged. It also has around 16% of its AUM in cash.

Since the fund has been launched only in 2013, we really don’t have a track record long enough to compare with other funds. But fact of the matter is that while the span maybe short, its performance hasn’t been great even in that short spell.

With a 3 year CAGR return of 15.66%, its return is half the Category Leader, Motilal Oswal MOSt Focused Multicap 35 Fund. But when it comes to draw-downs, the difference is not too big to suggest that the Multicap 35 fund is taking way higher risk than this fund which could account for the difference in returns.

2 Funds. Which one would you Buy? pic.twitter.com/qwRxYT8xft

— Prashanth (@Prashanth_Krish) May 21, 2017

Without the label of being a “Value Fund” , would you be a investor in the fund? To help you make a better call, here is what Warren Buffett said recently about this funds largest holding

Buffett said he had failed to see Alphabet’s growth potential, despite being a user of the online search giant.

One’s man’s trash is another man’s treasure goes a saying. But if all you have is data from the past, shouldn’t that be the only criteria to judge a fund / investment.

Adios!

Analyzing a few Mutual Funds

Mutual funds are one of the ideal vehicles to invest in the markets. But with a plethora of funds, its tough to identify what fund to go with. Should one invest in the top rated (by rating agencies such as ICRA) or should one invest in funds managed by star managers.

Among the large cap funds, HDFC Top 200 fund rules the roost. With Asset under Management of 14,285 Crores, its one of the biggest (if not the biggest) funds that you can find in India. Launched in 1996, the fund has a very impressive track record with compounded growth of 22.37% since launch. The expense ratio for the fund is 2.33% for the regular plan and 1.65% for the Direct plan.

Two funds that have a similar history (in terms of being launched around the same time) come from the Templeon stable.

First off was the Kothari Templeton Prima Fund (as it was called in those days). Launched in 1993, it has been one of the top performing funds with it having a return since launch of 21.80%. But despite such stellar returns, its Asset under Management is just around 3400 Crores. Expense ratio for the fund is 2.32% for the regular plan and 1.14% for the Direct (among the lowest you shall come across).

A year later, the fund house launched another fund – Kothari Templeton Prima Plus. The return for this fund since launch is 20.36% which while lower compared to the above two funds, is still way above many other funds with similar length of operation. For example, State Bank of India launched its SBI Global 94 fund in the same period and the return for that fund since launch has been just 16.08%

To close off, we shall analyze another fund that started off as the first Direct only plan and remains Direct only till date. It has one of the lowest expense ratio’s of 1.25% on assets. While the performance as we shall see has been better than HDFC Top 200 fund, its Assets under Management is a partly 416 Crores. The fund started off only in 2006 and hence the data history is limited compared to that of HDFC Top 200

To make it even, I shall analyze the funds starting from 1st April 2006 to make all of them comparable as well as to provide a better understanding of the risks one saw when the markets dipped in 2008.

First off, a comparison chart of the above funds.

(click on the above chart to get the full picture)

As can be seen, all the funds have beaten the benchmark (Nifty Total Return Index) by a pretty significant margin. In a way, this points out the advantage of actually investing in a fund versus investing in a ETF that tracks the benchmark index. Then again, since all these funds have investments in Mid and Small Cap firms), the logic of using Nifty as a benchmark in itself maybe faulty. But since we do not have the data (Total Return Index of CNX 500), we cannot but compare with what we have got.

While its clear that the funds have performed way better than the benchmark, what a investor should look at is how they performed when markets literally fell through in 2008 / 09. Since Mutual funds need to hold a minimum of 70% of their assets in stocks, when markets crash, they too unfailingly start falling though depending on how good the allocation of the fund manager is, some funds maybe better off than others.

For instance, right now, Quantum Long Term Equity Fund has its max level of cash (nearly 30%). In the event markets crash, this amount cash not only means a lower draw-down but also the fund manager is not compelled to sell stocks at their lows due to investor withdrawals.

While CNX Nifty touched its low in late October of 2008, we shall take the low of March 2009 (right before markets took off) to see how much the funds lost compared to the Index.

In the chart above, what you see is that when markets made their final bottom in 2009, it was performing much better than the Templeton twins. A near 70% draw-down in Prima Plus seems to suggest that while funds perform brilliantly in bull markets, thanks to moves in mid and small cap stocks, when one hits a bear market, its those very stocks that drag the performance to hell.

With markets being strongly bullish, investors are once again rushing to invest into mutual funds. A quote from a recent article in Mint shows how bullish Indians have become in the just concluded financial year compared to 2008

Mutual funds (MFs) invested a record Rs.38,627 crore in Indian stocks in the year to 31 March—more than double the previous highest in the year ended March 2008

Even investments into Portfolio Management Schemes has shot up substantially, but as the above data shows, the question that should be asked is, are investors prepared to wait it out in case things do not turn out as anticipated. After all, markets are not a one way street to riches but a way to channel earnings for a better return in the long term than one that can be achieved elsewhere.

Investing by just looking at performance can be risky if such performance was delivered by taking higher risks. One needs to understand that while there is always a give and take relationship, when the shit hits the fan, all kinds of logical thinking are quickly thrown out of the window with investors keen to get out at any rate possible regardless of the fact that cycles are common and one never knows when this will end and the next begins.

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The Behavior Gap

Momentum Chasing is Bad

Source: The Perils of Portfolio Turnover by David Blanchett.

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