Should Investors Tap Into Media For Investment Advice?

Last weekend at a party, I met a rather interesting individual who declared that ‘the best things in life are free’. To buttress his view, he spoke about investments, and questioned the need to engage an adviser (read pay a fee), when one can get free advice from the media i.e. publications and television channels. I’m unaware as to what drove his belief: experience or the lure of ‘free’. In any case, his views found several takers, and soon he was dishing out ‘free advice’ on the best sources of investment advice. 

To be honest, this isn’t the first time I have heard such views being expressed. Many investors are convinced that sourcing and acting on investment advice from media can be financially rewarding. But is that line of thinking prudent? Let’s find out.

Advice vs. Coverage

Any adviser worth his salt will agree that investment advice should be focused on the investor i.e. customised to his risk appetite, investment horizon and goals. The key is to navigate the investor’s portfolio through various events, and stay on course to achieve predetermined goals.

Conversely, the media typically focuses on current events and trends. The journalist/host will have a perspective in place. Domain experts contribute to the perspective with quotes and/or data. Having covered one event, the media moves on to the next.

Whether or not the coverage is apt for every investor following it, is anyone’s guess. Therein lies the fundamental difference between investment advice and media coverage.

Go Where the Wind Blows

In Feb 2016, when domestic equity markets crashed, stocks of public sector banks were among the worst hit, reeling under burgeoning bad loans. Expectedly the media coverage was negative, and most experts opined that the worst was far from over.

Between then and now, both bank stocks and equity markets have staged a smart recovery. While fundamentally not much has changed, appreciating stock prices have resulted in sections of the media putting a positive spin on PSU bank stocks with experts stating “You can’t do away with SBI. If it’s not in our portfolio, we are missing out on India’s economic growth…” and so on. To clarify, such instances of rapidly changing positions are common in media.

Is this a case of mala fide intent? Not at all. This is simply the nature of the beast; media covers events in a manner that will appeal to its audience. Investors choosing to treat media coverage as investment advice, and acting on the same, only have themselves to blame.

Should We Shoot The Messenger?

Does the solution lie in insulating oneself from media? I don’t think so. Media can be an excellent source of information and updates. Following reputed channels and publications can help stay abreast of events. That’s where investors must draw the line.

I’m not suggesting that every investor must engage an adviser. There are several who are conversant with the nuances of investing, and don’t need to engage an expert.

As for investors who need assistance, but have never paid for investment advice, admittedly it can be a difficult threshold to cross. But there’s a need to weigh up the downside of a misguided investment versus the cost of acquiring prudent and expert investment advice. 

In any case, relying on media for investment advice seems like an imprudent choice.

Direct Plans: Much Ado About Nothing

Admittedly, when I first heard someone complain about direct plans, I was surprised. But over time, the negative buzz has only grown. A few months ago, I met some individuals who are engaged in mutual fund distribution. Their grouse was that introduction of direct plans has resulted in a significant loss of business for smaller distributors like them. They were convinced that it was only a matter of time before all mutual fund investors migrated from regular plans (wherein the expense ratio includes distribution expenses, commission et al) to direct plans.

Then there were investors who were unhappy with their investments in direct plans. They maintained that direct plans were responsible for their woes. Things came to a head last month when SEBI issued a circular mandating that fund houses disclose information regarding commission paid to distributors, among others. Some concluded that this was a sly move to promote direct plans at the cost of regular plans.

In all the aforementioned cases, direct plans were painted as villains of the piece. But do those arguments hold weight?

       

Let’s consider the first grouse: direct plans have resulted in small distributors substantially losing their business. As per data released by AMFI, as of Feb 2016, “39% of the assets of the mutual fund industry came directly. A large portion of direct investments were in non-equity oriented schemes where institutional investors dominate”.

It is common knowledge that most institutional investors were (and continue to be) serviced by large distributors i.e. distribution arms of banks, broking firms and distributors with a nationwide presence. So it can be safely stated that institutional monies flowing from distributor mode to direct mode hasn’t had a significant impact on small distributors.

Now let’s focus on retail investments i.e. the universe largely catered to by small distributors. AMFI data reveals that of the total industry assets (INR 13.5 trillion), roughly 44% were held by individual investors; of these just 13% were invested in direct plans.

It is noteworthy that direct plans with a lower expense ratio have been on offer since Jan 2013. In other words, even after more than 36 months, a bulk (87%) of retail assets continue to be invested via distributors. The much-feared and speculated exodus of retail assets from distributor to direct mode hasn’t taken place.

The second grouse—investors expressing dissatisfaction with direct investments—has its roots in a half-baked understanding of how direct plans should be utilised. After they were introduced, benefits of direct plans (lower cost versus regular plans, and thereby higher performance potential) were universally extolled. Expectedly, some investors decided to invest independently, and chose direct plans over regular plans. However while doing so, several overlooked an important caveat: direct plans are meant for informed investors who can make investment decisions independently.

Not all investors who severed ties with their distributors were capable of investing prudently. To further complicate matters, their chosen alternative for the distributor—experts in media—left a lot to be desired. Experts offering generic opinions on investing in the media doesn’t necessarily qualify as investment advice.

A distributor offering advice based on the investor’s risk profile, investment objectives and horizon cannot be substituted by a media talking head. The need for robust investment advice was accentuated in the last 18 months or so, when markets were at their volatile best. Sadly, some investors have erroneously chosen to blame direct plans for their woes.

The merits of direct plans are indisputable. Indeed, their introduction has gone a long way in democratizing mutual fund investing. 

For investors who need investment advice and services, engaging a distributor and investing in regular plans is a viable option. Conversely informed investors can utilise direct plans and benefit from lower costs. The onus of making the apt choice lies with investors.

Beware of investment advice which reads...

Markets are in a celebratory mood. Election results not only met but surpassed expectations with the BJP-led NDA gaining a thumping majority. With markets surging northwards, it comes as no surprise that the performance of mutual funds has started looking up too. Pick up any business daily, and you are likely to find articles extolling virtues of mutual funds, discussing their performance and favoured investment areas. And then, there are experts dishing out advice on what investors must do. While some of the advice is sage, there is also a lot of rather disconcerting advice doing the rounds. I have chosen three pieces of investment advice which are at best half-truths, and at worst completely incorrect.

1. Dynamic bond funds work like a silver bullet

Will the RBI governor cut rates in the forthcoming monetary policy review or won't he? That seems to be the million dollar question at the moment. And this in turn, has led to a lot of discussion regarding dynamic bond funds. Simply put, the latter have a fluid investment style wherein the manager takes active duration bets, based on his assessment of where interest rates are headed. The manager's flexibility to position the portfolio across the yield curve is seen as a silver bullet. Sadly, there is a difference between plying a flexible approach and being successful at it. There are enough instances of even skilled bond fund managers woefully misreading the direction of interest rates. 

A case in point was mid-2013 when RBI's steps to bolster the weakening rupee spooked debt markets; at a time when consensus suggested that rates would soften, they rose sharply. As a result, several managers who had positioned their bond fund portfolios for a softer interest rate regime were caught on the wrong foot. Don't get me wrong--I'm not suggesting that dynamic bond funds are without merit. All I'm saying is: don't think of them as a magic potion for all woes. Even conventional short-term bond funds (which admittedly operate in a narrower band of say one-three years) are capable of adding value to the portfolio. Don't dismiss seemingly plain-vanilla products (read short-term bond funds) in favour of dynamic bond based on a misconception.

2. If the manager follows a consistent approach, the fund will perform

To be fair, a consistently plied approach is a positive as it infuses predictability. But to suggest that the same in isolation is a surefire recipe for success is naive. It takes a lot more for the fund to succeed. To begin with, it helps to have a skilled portfolio manager who is playing to his strengths. As for the process, it needs to be a robust one which is executed with skill. 

To better understand this, consider a process that relies heavily on making the most of mispricing opportunities between the cash and derivatives markets, or one that results in a substantial structural bias for certain stocks/sectors, or one that relies solely on momentum to deliver. These are examples of processes that aren't inherently robust, and ones that will succeed only in specific market conditions. Their consistent application won't automatically make the fund better equipped to deliver. Execution is no less important: consider a process which is rooted in valuation-consciousness and a long-term orientation. The robustness of the process notwithstanding, should the manager keep getting snared in value traps due to poor execution, the consistent approach is likely to be of little help.

3. Evaluate funds based on their holding pattern in top 10 gaining stocks

This one's rather bizarre. If it wasn't bad enough that investors were being misled to evaluate the performance of equity funds over shorter time periods like 1-year and 3-years (with scant regard for the risk-adjusted return showing), now apparently whether or not the manager was invested in the top 10 gaining stocks is a parameter to consider. To my mind, this demonstrates a poor understanding of both--the working of a mutual fund and what one must expect from it.

Funds are run based on their investment mandate and the manager's investment philosophy. A number of parameters such as market capitalisation, nature and quality of business, and valuations, among several others come into play. An investment universe is drawn out and stocks chosen from therein. Though it would certainly help if the best performing stocks were to feature in the manager's picks, it is certainly not obligatory. Let's not forget that in a sharp market upturn, it is often speculative, high-beta fare that fares the best. And the latter need not be the kind of stocks that every manager wishes to invest in. 

Broadly speaking, the test of a manager and his strategy should be the ability to score over the fund's benchmark index and comparable peers over longer time frames (read at least five years) across the return and risk-adjusted return parameters. Whether or not the manager is invested in the top 10 stocks is of no consequence.

In conclusion, there’s a lot of investment advice available in public domain. Investors on their part would do well to be discerning and act on advice that is apt for them.