Recently, after nearly 15 years at UTI Mutual Fund, Harsha Upadhaya moved out to join DSP BlackRock Mutual Fund. The mutual fund (MF) industry was aflutter last December when Nilesh Shah, a successful fund manager and erstwhile chief investment officer (CIO) at ICICI Prudential Asset Management Co. Ltd, announced his decision to quit after nearly seven years. In April this year, Anand Shah, head (equities) at Canara Robeco Asset Management Co. Ltd quit; Shah is credited with bringing up the performance of Canara Robeco’s equity schemes while he was there.
In the last two years, fund managers of at least 70 equity MFs have moved out. The number is significant and undoubtedly worrying for an investor, who relies on active management for above average portfolio returns.
How does it affect the running of a fund?
The trickiest and possibly the part that makes maximum difference to the situation is what gets done behind the scenes when a fund manager puts in his papers. There is no formula in place and the action taken depends on the policies and philosophy of the fund house.
Some fund houses prefer to let the fund manager leave as soon as the next day. Says Nikhil Johri, CEO, BNP Paribas Asset Management India Pvt. Ltd, “Fund management is a very important responsibility and after the fund manager resigns, it’s difficult to enforce a level of professionalism needed to manage funds. A fund manager quitting is the biggest risk that an asset manager runs. Usually it helps to have a planned succession because we typically follow the ‘gardening leave’ concept in most cases whereby the fund manager who quits is relieved of his duties and responsibilities the next day itself. ”
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Others prefer the fund manager to look into the portfolio and make changes needed for a smooth transition during the notice period.
In both cases fund houses prefer to rely more on systems and process rather than individual fund managers. Says Sundeep Sikka, CEO, Reliance Asset Management Co. Ltd, “It is unfair to say it is a one-man show.” Sikka says that the stability of the investment team has a big role to play. He adds, “For most funds we have a main fund manager and an assistant. It’s more about grooming in-house talent and preparing people for bigger roles.”
Though the star fund manager syndrome hasn’t really caught on in India like it has in the US and other developed countries, the Indian MF industry has seen a few fund managers shine over others. Prashant Jain (executive director and CIO, HDFC Asset Management Co. Ltd), R. Sukumar (managing director and CIO, Franklin Templeton Asset Management (India) Pvt. Ltd), Kenneth Andrade (head, investments, IDFC Asset Management Ltd), Sunil Singhania (head, equities, Reliance Asset Management Co. Ltd) and Madhu Kela (erstwhile head equities at Reliance Asset Management Co. Ltd) are few such names.
What about the new fund? There is of course another side to the coin: changes that take place in new funds that the fund manager takes over.
Look at the portfolio of two equity schemes of BNP Paribas after Anand Shah took over as CIO in April. According to data from Capitaline, a data tracker, in four months, BNP Paribas Equity Fund introduced 13 new stocks (21.16% of the July-end portfolio) and took out seven (14.17% of the July-end portfolio), whereas BNP Paribas Opportunities Fund took out 11 (13.29% of the April-end portfolio) stocks and added seven (12.14% of the July-end portfolio). It is noteworthy that the performance of both funds (they have the same fund manager since October 2007 and October 2009, respectively) has shot up in the last four months—they have moved from the last quartile to the top quartile among their peers.
So can one person affect fund portfolios and performance to a large extent? Says Johri, “This is not a simple issue. We did not have a CIO for a while and needed someone to fill the gap in terms of prescribed processes followed at BNP. Anand has come in as the CIO to fill that gap.”
How does it affect fund performance?
While it is common sense that the fund manager’s choice of stocks should technically play a big role in determining performance, it is difficult to allocate performance solely to one fund manager. According to Jayant Pai, vice-president, Parag Parikh Financial Services Advisory Ltd, “When a star fund manager leaves, one has to look at who is second-in-command. Those left behind should be good enough to take it up.”
Unfortunately, even though there are concrete indicators, there is no scientific way to ascertain how the performance suffers when a fund manager leaves and also how long it may take for it to improve.
Let’s look at long-term performance. In case of Sundaram Select Midcap Fund, a long-time top performing mid-cap fund, Anoop Bhaskar who was managing it since September 2003 left in March 2007. After he left, from being a top performer in its segment with a return of 14.19% against a category average of 1.47% between April 2006 and April 2007, the fund’s returns deteriorated to just about average within its category over the next one year, according to data from Value Express, an MF data tracker. The category average returns between April 2007 and April 2008 were 15.85% compared with 16.16% for the fund. Recent data shows that the fund’s relative performance has picked up and it is once again an above average performer in the top quartile within its peer set. Both Bhaskar and its current fund manager, Satish Ramanathan, have different management styles, the latter being more aggressive and holding a more concentrated portfolio than his predecessor. In such cases it is better to stick with the fund manager whose style you are more comfortable with.
What should you do?
The assets under management for equity funds has increased at least 12.5 times since March 2001, but there is dearth of quality manpower. Says Johri, “Experienced fund managers are difficult to find, but it’s not just the investment side where there is dearth of trained and skilled manpower.” There are currently 42 AMCs and approvals for at least 15 others are in the pipeline. Hence, it’s reasonable to conclude that fund managers changing jobs within the industry are likely to continue.
If the fund manager leaves, don’t panic and jump ship; watch the fund performance for at least six months. Also, keep track of significant portfolio shifts. Says Pawan Joseph, vice-president, Motilal Oswal Wealth Management Ltd, “When such an event occurs, we track the fund closely for three-six months to understand if there is any change in action by the new manager and whether he or she is replicating the good actions of the previous manager or making the same mistakes.”
Also, analyse the performance of the equity funds of the fund house you are with and of the new fund house where the fund manager has moved. A wise choice is to stick with the fund house that has a better long-term performance track record for its basket of equity funds.
Illustration by Shyamal Banerjee/Mint
Graphic by Ahmed Raza Khan/Mint.