When Peter Lynch, the star fund manager at Fidility Investment, quit in the early 1990s, the company's flagship Magellan Fund which was managed by Lynch was awash with redemptions. Reason: Lynch was one of the few American fund managers who managed to beat the market consistently rewarding investors with handsome returns year after year.
Indian mutual funds are still not as mature and very few fund managers have had such long innings to keep investors glued to their funds, yet the news that Alliance Capital and Zurich Indian Mutual are up for sale seems to be worrying investors.
The oft repeated question: is it a good idea to stay invested in these funds given the uncertainty? The concern is perhaps valid because these fund houses figure among the top three in terms of performance with reasonably long track records compared to their peers.
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Given this background, we spoke to a number of fund managers to get an insight into how critical is the role of a fund manager in the performance of a fund. Are funds really ruled by their philosophy, or by the faces hidden behind?
Most fund managers agree that the fund management game is pretty much an individualistic one. Success or failure is most certainly dependent on individual approach.
Says Ravi Mehrotra, director and chief investment officer (equity), Franklin Templeton Mutual, said: "In order to provide superior risk-adjusted returns consistently, there is no substitute for individual judgement."
Though most fund houses have a philosophy that governs all their schemes, each fund manager follows a strategy which is in line the fund's investment objective.
Some funds have internal guidelines on the maximum exposure to a particular sector, a maximum investment permissible on a particular stock, in addition to the guideline outlined by the Securities and Exchange Board of India.
Some others keep a tab on volatility measures as a risk containment strategy. Adhering to these stated rules is, however, only a matter of compliance. What really determines performance (we are talking only about equity-oriented funds) is the fund manager's skills and approach to investing; how well he can gauge the market sentiment and pick stocks that are potential winners. Exit decisions are equally crucial.
Even while following the same so-called "style" of investing, fund managers tend to develop their own distinct approach. For instance, both Templeton and Sun F&C claim to follow a value-oriented strategy. But the kind of stocks they pick are far from similar.
"The difference lies in the way a fund manger interprets data and extrapolates it to take decisions," says Suhaas Naik, fund manager, IL&FS Mutual Fund. But, actually speaking few fund managers do things differently. Most of them follow the crowd.
A cursory glance at the portfolio proves this point. A look at the portfolio of 41 open-end equity schemes as on September 2002 reveals that just 44 stocks found presence in more than 10 funds. If we lower the bar a bit and look at stocks which were common to five fund portfolios or more, the number jumped to 65. So one can hardly distinguish between portfolio of various schemes.
Having said that, the key is to get the sector allocation right. Says S Naganath, chief investment officer, DSP Merrill Lynch: "Sector allocation is like bread and butter and I would attach about 85 per cent importance to this call."
Except for a few names such as Samir Arora, the chief investment officer of Alliance Capital and Bharat Shah, the former chief investment officer of Birla SunLife Mutual, few fund managers have demonstrated their ability to spot companies early and earn mega bucks from it. Some have simply abstained from venturing into unchartered territory on grounds that it is a risk strategy.
Many other fund managers such as Zurich have gained tremendously by simply following a disciplined approach or timing the entry and exit even with mundane stocks.
In the past one year, the best fund Reliance Vision gave a return of 76 per cent, while the worst gave a return of -3 per cent. This wide disparity in the performance of various funds in a lacklustre market and limited choice of stocks is testimony to the fact that fund managers do play a crucial role.
For large institutions, it becomes imperative to have fund managers following distinct styles. "In case of bigger fund houses, it becomes even more important to have multiple pillars," says A K Sridhar, chief investment officer (equity), Unit Trust of India (UTI).
At any given point in time, some schemes will always perform well compensating for underperformers, if any, and keep the money from flowing out of the fund. That's one of the reasons the country's largest mutual fund moved away from a centralised decision making to a decentralised fund management system. Today, UTI has 14 fund managers.
Indeed, in an increasingly institutionalised and process driven field where all portfolio decision making is sought to be distilled into a 'science', it is more important than ever before for fund managers to think independently and treat money management as an 'art' characterised by an ability to look at handle situations with a unique approach explains Mehrotra.
Nevertheless, it is possible to reduce the dependence on individuals by properly positioning funds and having well laid out investment processes and criterion.
Sums up a fund manager: "It is possible to deliver an above average performance over long-term with good processes and average people, but for outstanding long-term performance both people and processes are very critical."
Inside Box
Beating benchmarks
Indian mutual funds seem to be clearly defying the logic of efficient market theory, if one were to go by their performance this year. Out of 59 open-end equity diversified funds, only two have underperformed the BSE Sensex in the past one year. On an average, equity funds were up 14.45 per cent even as the Sensex slipped by 1.35 per cent.
However, the picture doesn't look as pretty when one looks at returns generated over a three-year period. Even then, about 76 per cent of funds -- about 35 out of 46 funds -- outpaced the Sensex in the past three years. This only means investors have much to benefit from taking the mutual fund route to investing.
Looked at another way, it is not as though you would have made money only if you chose the 'right' fund manager. Even if you had picked an equity mutual fund randomly, you would have been better off than the market in general.
But it is not as though actively managed equity funds always outperform their benchmark at all times. In fact, they do not. It is a function of the kind of opportunities the market throws at any given point.
For instance, while the BSE Sensex fell marginally in the last one year, the broad market represented by the BSE National index gained 5.03 per cent.
Recognising this opportunity, many fund managers hiked their exposure to mid-cap stocks to gain from the rally in mid- and small cap stocks earlier this year. This perked up returns a bit. Not all gains can be attributed to this though.
In a rangebound market with frequent ups and downs, fund managers have gained more from trading. Says S Naganath, chief investment officer, DSP Merrill Lynch Mutual Fund: "Astute stock picking and swift sector rotation has helped fund managers beat the market this year since there was no secular trend in the market".
This is quite opposed to the trend in 1999, when fund managers hooked themselves to the IT bandwagon to show up triple digit returns. There was no such secular bull run in any segment which the fund manager could have utilised to simply load up stocks in that sector to make a killing.
This year's performance may not be sustained in future. Just recollect what happened after the tech boom: at the time, most fund managers went overboard on their technology exposure keeping their weights substantially higher. Owing to this, funds slumped more than the index when the tech bubble burst.
For now, just keep your fingers crossed.