For some time now, The Association of
Mutual Funds in India (AMFI) has been running an ad campaign “Mutual Funds Sahi
Hai”, to propagate the cause of mutual funds. Incidentally, these are good
times for Indian asset managers with industry’s assets soaring to record highs.
Clearly, investors have taken to mutual funds in a big way.
I thought it will be interesting to find
out if portfolio managers who run mutual funds have taken to them as well. To
my mind, a manager investing in his fund speaks volumes about both, his
commitment to the fund, and confidence in his abilities.
In 2016, market regulator SEBI made it
mandatory for fund companies to reveal information about investments made in
each fund, by the fund’s portfolio manager, and other key personnel.
I compiled a list of the 50 largest
equity funds (excluding hybrids) to study portfolio manager investment
patterns. These funds account for roughly 61% of the industry’s equity mutual
fund assets, making them a representative sample.
Some disclosures are in order: In the
hunt for most recent information, I have perused various documents—Scheme
Information Document, Statement of Additional Information, and Key Information
Memorandum. However some fund companies continue to disclose information as on
2016, while others have released updated numbers.
Another area of inconsistency is the
investment figures. It is apparent that several fund companies have disclosed
the current value of manager investments, rather than the sum invested (which
is evidently more relevant). The only fund company which stands out in this
aspect is SBI Mutual Fund, for having unambiguously disclosed both—the sum invested
and current value of investment. This is an area where SEBI needs to step in,
to ensure that manager investment are disclosed in a uniform manner across the
board.
To analyse the data more efficiently, I
broke down investments into the following ranges: 0, INR 1—INR 20,00,000, INR
20,00,001—INR 40,00,000, INR 40,00,001—INR 60,00,000, INR 60,00,001—INR
80,00,000, INR 80,00,001—INR 100,00,000 and over INR 100,00,000. The results
are interesting:
Out of the top-50 funds, 20% have no
investments from their portfolio managers.
The INR 1—INR 20,00,000 range is the most
populated one, accounting for 27% of the top-50 funds.
Cumulatively, the bottom two ranges (no investment,
plus INR 1—INR 20,00,000) account for a staggering 47% of the top-50 funds.
This is disappointing to say the least.
It can be safely stated that several
Indian portfolio managers have little or no confidence in their investment
abilities.
Defending the
Indefensible
At this point it must be stated that
manager remuneration disclosures reveal that an annual compensation of roughly INR
1 crore (INR 10 million) is common even at mid-sized fund companies. So the defence
that managers don’t have monies to invest in their funds doesn’t hold water.
Managers can’t take refuge under the
pretext of low tenure either, since 80% of the top-50 funds have had their
present lead manager at the helm for over two years.
Finally, a portfolio manager helming a
niche fund (such as a money market fund or a sector fund) is perhaps justified
in having a small investment. However, the top-50 list is comprised of
conventional equity funds, which means that there is no excuse for having zero
or tiny investments.
The Counterview
Sceptics might claim that a manager
making a substantial investment in his fund doesn’t guarantee performance. But,
it is an undeniably important evaluation tool, which demonstrates the manager’s
conviction in his investment approach and acumen, and more importantly, his
commitment to the fund.
I fail to see why investors should invest
in a fund that the manager isn’t entirely committed to. I am certain that like
me, most will be wary of the chef who doesn’t eat his own cooking.
On a final note, perhaps AMFI should
initiate an ad campaign targeted at portfolio managers to convince them about
the benefits of mutual funds.
