Last week, it was reported in the media
that portfolio manager Manish Gunwani has quit ICICI Prudential AMC. The recent
past has witnessed a fair degree of churn among managers; media reports suggest
that more exits are on the cards.
A portfolio manager’s exit is an
eventuality that mutual fund investors are bound to encounter at some
point. Given that the manager helms the fund, expectedly, his exit can
have a bearing on investors.
On their part, investors must evaluate
how the manager’s exit will impact the fund. More importantly, they must
determine if the fund should continue to find place in their portfolios.
Sadly, investors’ task tends to be
complicated by rather diverse perspectives.
Perspectives
From a fund company’s perspective, a
portfolio manager’s exit is often treated as a non-event. Typically, the
reaction will be: “we have robust investment processes in place; hence manager
XYZ’s exit will have no impact on our fund’s performance”.
To be fair to the fund company, it is in
its interest to say so. One can’t expect a fund company to admit that a
manager leaving is a loss, and that investors could be in for
troubled times.
On the other end of the spectrum is the
portfolio manager-centric perspective. The latter stems from the belief that
the manager is the be-all and end-all for the fund. Hence, all bets are
off.
As is often the case, the truth lies
between the two extremes.
Individual
Brilliance versus Institutionalised Skill
Let’s understand how the investment
process works at a typical fund company. The investment team comprises of
products specialists, risk management professionals, research analysts, and
portfolio managers. Each group performs a specialised task utilising an array
of tools and resources.
Investment ideas are originated, debated
and vetted before making it to the fund company’s ‘approved’ investment
universe. Paper portfolios (also referred to as model portfolios) are created
and tracked as an internal guideline. Often each fund is backed by a unique
template listing guidelines.
Though the portfolio manager is the first
among equals when it comes to running a fund, at times, investment committees
also have secondary oversight on funds.
As is evident, a fund company
deploys considerable resources to institute investment processes. Hence
their typical reaction in response to every manager exit.
So does that make the portfolio manager
redundant? Can investment processes eliminate the need for a manager? The
answer is--No!
To begin with, not every
investment process is necessarily robust. It takes a skilled manager to
capitalise on available resources and process. Indeed, in some cases, the
manager’s individual brilliance can deliver pleasing results, despite the
presence of a less-than-robust investment infrastructure.
The truth is that if
processes in isolation could have guaranteed success, then every buy and sell
decision would have been made using algorithms, and the portfolio manager would have been an extinct
species.
Conversely, those who believe that the
manager is the be-all and end-all, must not forget that without the
fund company’s resources and instituted processes, a manager could
find himself disadvantaged, and perhaps unable to play
to his potential. Though the manager is the face of the fund, the forces
behind the scenes shouldn’t be overlooked.
Simply put, both investment processes and
the manager’s skill contribute to the fund’s success. It would be imprudent
to discount either of them.
One Size Doesn’t Fit
All
Each fund company has in its arsenal,
different investment processes and managers possessing varied skills. Hence the
key is to determine which factor contributes more to the fund’s
success.
For instance, a combination of a robust
process plus a skilled incoming manager can make a manager exit, a non-event.
Conversely, if a fund’s success can be largely attributed to the manager’s
presence, then his exit should raise a red flag, irrespective of what the fund
company claims. In other words, the impact of a manager exit needs to
be evaluated on a case-by-case basis.
Admittedly, understanding the nuances of
a fund company’s internal workings can be difficult for an investor. That’s
where the investment adviser has a part to play in helping the investor make an
informed decision.
All in all, a manager’s exit merits
consideration, and investors’ response should be based on an in-depth
understanding of the facts of the case.
