Time For Absolute Returns
The Economic Times dated 30 October carried an interesting analysis on mutual fund returns. Some five funds were shown as examples under the heading ‘Top Performing Mid cap schemes’. Please note the title, it is important. The article then went on to list some of the stocks that these funds owned. Here is a sampler: Page Industries, Kaveri Seed, Mrf, Asian Paints, United Spirits, Mindtreeetc and according to the article, ‘ bought at dirt cheap valuations’ and ‘ continue to dominate’ the portfolios. Doing some simple checking, one would find these and similar such stocks (which, presumably, would also be part of the portfolio, though perhaps not in such a ‘dominant’ way), it could be seen that most of such stocks have delivered anywhere between 25 to 200% return over the last year. Given this kind of performance it would be natural to think that the returns on the ‘Top performing’ mid cap funds would be something attractive.
Imagine the surprise when you read in the article that the one year return has been around 4% (with one of the featured showing a negative return) while a 2 year return gets even worse- dropping to around 2%! Matters are sought to be rectified by showing a five year return- a healthy 25%. But what is not mentioned (conveniently) is that five years ago was October 08 and the index was trading at its lowest! So the 25% return is a bit misleading, I would think!
One wonders what would be the return if those names mentioned afore were not there. And if this is the fate of the ‘Top performing’ funds then what is the situation with the rest?
The fund management business is a funny business. Investors seem to be keener not to lose money than to make money! That can be the only explanation as to why they continue to put up with such incredibly unimpressive performances and still funnel money into schemes. The lack of alternatives is spoken of as a reason to do this but is that really true? Funds will highlight their best performances when they want to sell and gloss over their weaknesses. You can blame them for it- after all, it is their business to keep the AUM figure ticking and enlarging. But investors need to also think about what they are doing. It is their job to increase their returns in whatever manner possible. If they take a fatalistic view that such ‘Top performing’ stuff is the only thing they can get then, they deserve what they get! Here is a fundamental fact for you- the objective of the two people in this contract is very different. For the MF, it is all about the AUM and keeping that intact and growing. For the Investor it is all about the Return and getting that to go higher. With differing focus how can the two really work together in any meaningfully productive way?
The Hedge fund industry overseas really came up the way it did because, I believe, investors were sick and tired of low returns from the AMCs. I feel the same is about to happen in India. With every attempt to get better returns failing, investors will now be driven towards hedge fund type structures which have not started cropping up. The next boom is going to be in this area.
I myself have moved towards this area and am concentrating my entire efforts to creating an approach that delivers superior Absolute returns to investors. Thanks to Sebi, the Alternate Investment Fund is seeing the light of day and should soon become the major vehicle for those seeking higher, consistent, absolute returns. I do believe that my long term goal of becoming a hedge fund manager is about to realized.