Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Money / Calculators/  How to manage a fund manager change
BackBack

How to manage a fund manager change

While you should keep an eye on a fund that gets a new manager, it may not always be necessary to exit it

Shyamal Banerjee/MintPremium
Shyamal Banerjee/Mint

In February 2016, Anoop Bhaskar joined IDFC Asset management Co. Ltd as the head of equities. He replaced Kenneth Andrade, who left the fund house to start his own venture. On the face of it, you might ask: what is new?

Look again. Although both—Andrade and Bhaskar—come with good, long-term track record and have been around for many years, both are as different as chalk and cheese in terms of their style of fund management. Andrade made his name at IDFC Asset Management by managing—with a singular focus—the IDFC Premier Equity Fund (IPEF; a mid-cap scheme) ever since its launch in September 2005. That is a little over 10 years. Punam Sharma—the co-fund manager of IPEF since its inception, and who worked alongside Andrade—also recently quit the fund house. Now, Bhaskar, an outsider, will take charge of the fund.

Look closer. At 6,120 crore, IPEF’s size is about 70% of the fund house’s equity corpus; whether this was the most important scheme of the fund house by design or by choice is another story. For now, the question is: do fund manager changes matter?

People versus processes

Most fund houses claim that internal processes matter more than individuals. They say that if a fund manager leaves and another takes over, the scheme continues and so does its day-to-day management. Even though fund managers manage schemes, they are guided—or are bound, depending on how you look at it—by rules. These rules could be defined by actual numbers, such as a diversified fund having to remain diversified and not have mid-cap scrips beyond, say, 20-30%, or that no scrip should account for more than, say, 6%, of the scheme’s corpus or the fund cannot have more than, say 5% of the scheme’s corpus in cash and so on. Or, they could be in terms of how a fund manager buys or sells stocks that entail her to list out decisions, run them past few a specified filters, and to ensure every such decision meets a certain checklist.

When Sivasubramanian K.N., former chief investment officer, Franklin Equity-India, Franklin Templeton Asset Management (India) Ltd, chose to retire from his job at age 52 in February 2014, it wasn’t just any legacy he was leaving behind. Having joined Franklin Templeton in 1993 when it was known as Kothari Pioneer Asset Management Co. Ltd., he managed Franklin India Prima Fund (FIPF), a mid-cap oriented scheme, since 1997. Janakiraman Rengaraju—his co-manager since February 2008 (he had joined the firm in 2007) till the time Siva retired in 2014—took over FIPF when Siva left. Till the time he retired, FIPF had returned 19% since inception.

Did FIPF falter after Siva left? No. Between the time Siva left and now, FIPF returned 37% as opposed to 31% returned by the category and 29% returned by its benchmark index (NSE Nifty Free Float Midcap index) and is in the top quintile.

So, processes matter most; individual fund managers don’t, right? Wrong. Before Anand Shah, chief investment officer at BNP Paribas Asset Management India Pvt. Ltd, joined the fund house in March 2011, it wasn’t known for its equity funds. Most of its equity-oriented schemes were in the bottom quintile, had negligible corpuses and nearly 94% of the fund house’s assets were in debt schemes. Shah’s playing field was huge as he joined as the head of equities and decided to change things. Within a year, the fortunes of the fund house started to change. Returns of BNP Paribas Midcap Fund and BNP Paribas Equity Fund were in the top quintiles in 2011, 2012 and 2013. It helped the fund house that Shah also changed the way BNP Paribas AMC looked at equities; focus towards analysing businesses instead of focusing too much on valuations was one such change.

Nilesh Shah, who now heads Kotak Mahindra Asset Management Co. Ltd, was the head of India fixed income division of Franklin Templeton Asset Management (India) Ltd between 1997 and 2004. In Shah’s early days at Templeton, the fund house took a hit of about 5 crore in one of his debt schemes due to a credit default. Shah recollects that although he hadn’t quite liked the company, he was “compelled to manage the fund in a particular way because of its international policies". Shah lost his patience, walked into his boss’s office (Rajiv Vij, who was the head of the fund house in India then) and demanded to be allowed to run the fund his way. Although Vij gave the nod—and Shah got the freedom he wanted —he also made sure that Shah made a manual of how the Indian arm’s debt schemes should be managed hereon, to take care of the succession plan. “I was young and conceited back then and didn’t initially feel the need to make a manual of how I managed my funds. But I realised that as important as key people are, the thought process must be carried forward," said Shah. Between 2001 and 2004, when he left the firm, debt funds saw glorious days on the fall of interest rates; his income fund had returned 11.28%.

Do changes in portfolio happen?

Even though many fund officials claim that processes reign over people, fund managers, especially those who come with a good track record, admit that portfolio changes are inevitable. How soon these changes are implemented depends on the fund house. “A fund house may have a detailed set of guidelines and processes of how to invest, how to buy a stock, how to sell, and so on. But how we interpret a particular situation differs from person to person. People do play a role," said Bhaskar. BNP Paribas’ Shah says that smaller portfolios may take about 3-4 months to change; larger ones take 9-12 months.

After Shah took charge at BNP Paribas AMC, he and his team changed most of their schemes’ underlying portfolios and added a host of companies, whose businesses, he says, were business-to-consumer (B2C). “I wanted to move away from companies involved in business-to-business (B2B). B2C companies are more resilient to volatile markets; customers of their products don’t move away. A B2B consumer can move away if it gets a slightly better bargain; consumers here aren’t sticky and businesses can get impacted fast," he said. And the change happened swiftly. For instance, out of the 20 companies that were part of BNP Paribas Midcap Fund’s July 2011 portfolio, 12 were new entrants.

When Harsha Upadhyaya joined Kotak Mahindra Asset Management in August 2012, not only did the underlying portfolios changed slowly, but the turnover ratios of its equity schemes started to dip. “When I took over, the turnover ratios were in the range of 150-200%. These are very high churn rates. Now, our rates are down to 25-50%, which means we buy stocks where we are highly convinced about them and hold them for the long run," he said.

Then, there are fund managers who subtly make tweaks. Soumendra Nath Lahiri, chief investment officer, L&T Investment Management Ltd, inherited L&T Equity Fund and L&T Tax Advantage Fund in September 2012, just as the fund house was in the middle of completing its acquisition of Fidelity group’s Indian mutual fund business, FIL Fund Management Ltd. Lahiri likes to hold a tighter portfolio and prefers to have a higher allocation to his top holdings. But L&T Equity and L&T Tax Advantage funds (former Fidelity schemes) came with slight limitations. As per the offer documents, they were meant to hold “about 60-80 stocks" in their portfolios at all times. Lahiri brought down the holdings to 50-55. “Every once in a while, I try to bring it down a bit further but my compliance team instantly alerts me if the number of holdings drops, to what seems like, further away from the 60-stock limit. That limit is still there," he said. He made changes to the underlying portfolios after he took over; reducing the schemes’ exposures to real estate stocks, and increasing allocation to power and distribution and auto ancillary.

What should you do?

In India, where active funds have largely outperformed passive funds over time, it is naive to think that a new fund manager won’t change the portfolio. How much of a change she brings and whether the change has any impact on the fund becomes clear only after a some time. While it is prudent to keep a close eye on the fund that gets a new fund manager, it may not be necessary to always throw the scheme out of your portfolio.

Pramod Kumar, co-founder and chief executive officer, Wealth Advisors (India) Pvt. Ltd, a Chennai-based boutique wealth management firm, keeps a hawk eye on the mutual fund industry and has a slightly different, yet interesting take. “Styles are important. If you bought a fund based on a particular fund manager’s style—no matter how good the new fund manager would be—it still makes a case for you to get out. Because the reason why you had bought that fund, has now changed," he said when we asked him about Bhaskar versus Andrade. That is also why Lahiri and L&T Investment Management continue to manage the two biggest Fidelity schemes, more or less the way they were managed during Fidelity’s times “because that is how the scheme was sold to investors back then," said Lahiri.

If you have been too fastidious about your fund manager’s style and that was the main reason why you had chosen the fund, assess the style of the new fund manager. If there is a marked difference, exit. Else, wait for about a year or so to check the performance and assess if the philosophy remains the same.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 04 Jul 2016, 08:00 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App