Stupid Portfolio Manager vs. Ignorant Portfolio Manager

Aggression seems to be the flavour of the season. Several politicians routinely breathe fire; at present, students at a New Delhi campus are in a belligerent mood. No discussion on Indian cricket is complete without the mention of aggression; likewise, a bespectacled newscaster known for his confrontational demeanour tops the TRP charts. And just when one thought it couldn’t get any more interesting, aggression has reached the mutual fund industry.

Recently, the promoter of an asset management company published a piece insinuating that competing portfolio managers are stupid. His contention is that since the NDA government assumed charge at the centre, bogus/hyped earnings estimates have been doing the rounds. Hence, equity portfolio managers who believed in and acted on the same are stupid. Furthermore, portfolio managers who didn’t fall for the hype, but failed to communicate their misgivings (on lucrativeness of equities) to investors are dishonest.

Apart from a touch of arrogance, the piece also reveals a poor grasp of how investing works. Investing is a personalised activity i.e. each investor pursues an investment philosophy and strategy that works for him. This principle holds good for portfolio managers as well.

For instance, while some managers pay more attention to top-down factors, others rely on bottom-up analysis. Some invest with a growth-bias, while others have a value-bias. There are managers plying research-oriented strategies and others who deploy a sentiment and momentum-driven approach. Even the investment horizon can vary significantly. Admittedly some strategies are more efficient than others, but that doesn’t take away from the fact that investing isn’t a one-size-fits-all activity, as the article erroneously suggests.

Equity investing isn’t a pure science. When a manager evaluates a business, factors such as his investment philosophy, interpretation and biases (among others) come into play. To suggest that every manager should have (or did) read the macroeconomic environment in a uniform manner is oversimplification. More importantly, is it apt to evaluate managers based on one event? Prudence demands that an equity manager be evaluated over the long-haul spanning a market cycle.

An element of bragging rights is perceptible too. Over the last year or so, equity markets have experienced a fair bit of volatility. The flagship equity fund (from the author’s AMC) takes cash calls based on valuations, and has expectedly fared well in a peer-relative sense. The portfolio manager and strategy deserve credit for the showing. However, that doesn’t diminish the credibility of competing managers who don’t take cash calls; expectedly, such funds have fared poorly in the recent past.

   

On the dishonesty bit, yet again the author displays his ignorance by mixing up the roles of an adviser and a portfolio manager. The latter is responsible for running the fund to the best of his abilities and in the investor’s interest at all times. However, offering the investor asset allocation-related advice, or managing the investor’s portfolio is not the manager’s role. That’s what advisers are engaged for.

In the competitive asset management industry, the need to celebrate and spread the word about one’s success is understandable. However, branding the competition as stupid and dishonest on untenable grounds reeks of ignorance.

Why election investing isn’t for all

To say that general elections 2014 have captured the public’s imagination would be stating the obvious. It’s not every day in a cricket-crazy country like ours that the IPL is relegated from the front page to the sports page. The magnitude of the election frenzy can be gauged from the fact that it has now spread to the domain of investments. Business dailies and channels have a plethora of ‘election investing’ tips to offer. Investors are being advised as to how they must position their portfolios to benefit from the impending election results.

What’s driving election investing?

It is widely believed that the NDA will form the next government and that markets will respond positively to the same. In fact, some have even termed the recent run-up in markets as a ‘hope’ rally. Others are invoking history, and banking on it being repeated: in 2009 when the UPA gained a majority (defying the odds) markets rose sharply.

But isn’t that speculation...

To be fair, investing in markets is a forward-looking activity i.e. assumptions are made and a hypothesis is built around it. Expectations of what may happen (going forward) are factored in while making investment decisions (at present). 

However, when investors pin their hopes solely on an event such as election results, they are speculating. Effectively, they are emulating soothsayers and trying to forecast not only what the outcome of the election will be, but even how markets will react to the same. 

And for those who believe that market behaviour after election results is a sign of things to come, here’s something to mull over. In 2004, when the incumbent NDA was voted out of power, equity markets tanked; however, that was followed by a strong bull run which lasted until early 2008. Conversely, when the incumbent UPA returned for a second term in 2009, markets skyrocketed; that was followed by one of the most testing periods for equity markets. Simply put, investors who would have based their investments solely on how markets reacted to election results would have been in for an unpleasant surprise.

What investors must do

It comes down to whether one is a long-term investor or a short-term investor. For a short-term investor who bases his investment decisions on momentum, sentiment and news flow, and is willing to trade aggressively, the election period (i.e. days leading up to the result, the result day, and the ensuing period) is undeniably important. There will likely be several opportunities to ply one’s skills and make money.

Conversely for the long-term investor, the election result isn’t particularly important, and he can afford to be passive. To begin with, he doesn’t have to re-align his portfolio in expectations of what may happen; neither does he have to buy-sell at a furious pace to benefit from the volatile markets.

If anything, it might be an opportunity to clean-up the portfolio. For instance, if the markets do indeed rise sharply, it will be a good opportunity to sell investments that aren’t right for the investor, or are overpriced at a neat profit. Conversely, falling markets might offer opportunities to make some bargain buys. But any further focus on election results will be a futile exercise. 

In the long-run, while several factors can have a fundamental impact on the attractiveness of an investment avenue, the election result is certainly not one of them.