When the Fund Stops – A Book Review

“You are as good as your last trade” is something that is often said to traders. Investors generally have it more easy. Fund Managers when they are generating returns are seen as the Gods of Men and yet as soon as they hit a rough patch, they are thrown to the wolfs and the search for the next Fund Manager with a Midas touch begins once again.

Don’t look at performance alone says everyone and yet its fund performance is the only real signalling mechanism as to whether a fund is doing good or not. What this also means is that when funds are managed using vehicles such as Mutual Funds where investors can withdraw at ease, straying outside the zone of what is seen as acceptable can have very huge consequences.

A book I just finished reading is David Ricketts – When the Fund Stops . The book looks into the downfall of Neil Woodford who was once Britain’s most successful fund manager. It’s a pretty slim book and one that seems written to throw the fund manager under the bus for his omissions and commissions.  

From the Indian perspective though there are certain interesting differences in how funds are managed in India vs UK. For instance, its surprising to learn that most funds don’t disclose the total portfolio holdings (Neil tried to do it differently and was more transparent than the law required by disclosing the portfolio fully). Also surprising to learn that there seems to be no limit on the percentage of equity of a company that a fund manager can own. 

In many ways, it seems that if someone tomorrow wrote a story about Santosh Kamath and the demise of Franklin Templeton (at least on the Debt side of the table), the story would be similar in many ways. The only difference though is that Santhosh blew up when at Franklin while Neil blew up after leaving Invesco and starting on his own.

It’s easy to blame Neil’s blow up to his decision to own a larger portion of the portfolio in low liquid stocks / small cap stocks which in hindsight seemed to be risky with many losing tons of money. But we get no details about the contribution of similar small stocks in his long career when he generated strong returns for the investors. If he was doing something similar earlier and had succeeded, did he really change gears as the Author seems to suggest I wonder.

The similarity with Franklin is also about how the fund was shut down to allow for an orderly sell off though unlike Franklin, this decision was taken by the Custodian of the fund. On the other hand, the Custodian’s decision to sell the portfolio slam dunk seems to have made matters worse for the investors. For now, Franklin seems to be able to redeem without having to for a firesale and one that would regardless of the quality of assets hurt the investor.

Fund management is tough but so are the rewards. Neil and his co-partner Newman had paid themselves 111.5 Million Pounds since they had launched the fund till their exit. Most investors on the other hand would have suffered. 

One of the smartest moves in hindsight that Warren Buffett did was to build a moat around himself by ensuring that his investment vehicle was one with permanent capital and hence not subject to the vagaries of customer’s wishes and wills. Doing different from the crowd doesn’t mean it shall work out all the time or even in time but doing different requires a different type of capital than one that could be called back any day. That seems to be the greatest mistake of both Neil Woodford and Santosh Kamath. They tried to be different while investing money that they knew could be called back any single day.

All in all, the book is a easy read. Not much to learn from it though. I rate it 3/5