Focus is on funds, not their managers

The past four-year period has been an unusual one. In the calendar years 2012 to 2015, the S&P BSE Sensex first went up by 25% in 2012, then by just 9% (2013), then went up again by 30% (2014) and in 2015, fell by about 5%. It wrecked havoc on many mutual fund (MF) schemes and on those fund managers who thought the economy would witness a turnaround after the Narendra Modi-led National Democratic Alliance swept elections in May 2014 and formed the government at the Centre.

However, by and large the Mint50 basket has done well irrespective of market movement. At the end of the past three calender years, at least 80% of Mint50 schemes have outperformed their category averages over five-year periods. The quest is to get this percentage higher.

Mint50 turned six in 2016, and over the years we have made two subtle changes to our policy of selecting schemes.

First, we will no longer remove a scheme just because its fund manager has left. For instance, Anoop Bhaskar, who was head of equity funds at UTI Asset Management Co. Ltd, is now heading IDFC Asset Management Co. Ltd’s equity funds division. Two of Bhaskar’s schemes, UTI Equity Fund and UTI Opportunities Fund, both of which are in the Mint50 list, have not been doing so well of late. But he has left his biggest stamp on UTI Midcap; a scheme that we included in Mint50 just a year ago. True to his style, Bhaskar has kept some 100 stocks in the portfolio, up from about 62 at the start of 2014.

But it’s hard to imagine a fund house as established as UTI AMC crumbling just because one fund manager leaves. People are important, but most strong fund houses come with processes too. Also, a fund house like UTI should be able to attract a good replacement.

Second, from now on we will prefer funds that don’t take cash calls. There was a time when that was workable and when funds such as Quantum Asset Management Co. Pvt. Ltd defied convention and set shop in 2006, we thought it was a good variety. It worked for a while, but Quantum Long Term Equity Fund’s (QLTEF) cash levels were too high for our comfort for a long time and it appears to have hurriedly deployed much of it back into equities in the middle of last year despite markets continuing to fall till as late as early January 2016. Reasonable cash calls are acceptable, but we feel that there are more compelling cases than QLTEF at the moment.

The past two-three years have been tricky as the economic turnaround has been slow, policymaking hasn’t lived up to expectations just yet (at least in the public domain, even if efforts are said to have been going on in many quarters) and companies have reported dismal revenues, quarter after quarter.

Fund managers such as Prashant Jain of HDFC Asset Management Co. Ltd, who have been banking on better conditions, have been caught between a rock and a hard place as the stocks and sectors that they have bought aren’t showing much signs of improvement. The banking sector—especially the government-owned banks, led by the country’s largest lender, State Bank of India—are still burdened by rising non-performing assets and markets are looking for signs of improvement before they throw their weight behind the sector. And now, having bought these stocks and suffered for more than a year or two, some of the fund managers don’t seem to want to sell such stocks only to be caught off guard; what if the stocks turnaround after they sell?

Some financial advisers I have been speaking to have asked their investors to exit Jain’s schemes. They are reluctant to let their investors suffer for what they call, the cost of Jain’s conviction or pride. Year 2016 will be a litmus test for Jain since his equity schemes have been in the bottom quintiles in three of the past five calendar years.

So, what about Mint50? We continue to hold on to his schemes for now because Mint50 is not a portfolio for any specific reader; it is a basket of schemes that aims to give a choice and from where readers can pick and choose. Of course, that doesn’t give us the right to compromise the quality of our offerings. For now, we choose to wait for a little longer before pulling curtains down on Jain’s schemes.

It is not our domain to tell fund managers how to manage their funds. Stock and sector selection is a fund manager’s expertise; we can’t say why they bought a stock over another. Our job is to ask questions, intelligent ones, so that you, the reader and the investor, can decipher them better. For instance, when mid-cap funds bloat their portfolios in the name of diversification or start to invest in large-cap scrips because they think mid-caps can be illiquid, but still accept investor’s money and refuse to shut their doors, we ask why. That’s all.