The Hindu Business Line : The compulsions of fund manager

The fund managers' role is restricted only to stock selection, while market timing, in the open-ended vehicle is done by the investors themselves, by way of their entry and exit into the schemes.

"There is enough in this world to satisfy everyone's need but not enough to satisfy everyone's greed."

Fund Managers unfortunately are in positions, which compel them to try and achieve the latter for their investors.

In today's environment, open-ended funds (with easy and intense inter-fund mobility and competition) put immense pressure on the fund managers to perform relative to their peer group, impeding any alternate courses each one might chart for his fund.

The other impediment faced is that by virtue of the funds being open-ended, liquidity of the portfolio and every scrip therein becomes an important and significant deciding factor and this often constrains the fund managers to investment choices which are not based solely on valuations but lay excessive emphasis to the liquidity of the scrip.

This translates into inhibiting fund managers from making long-term calls on new/emerging investment arenas, since the early days of the business or company often mean lower acceptability/liquidity on the bourses.

The anathema on occasions even extends to existing businesses — turnaround cases, re-structuring cases — which are "not in favour" on the exchanges. Besides the constraints imposed by the liquidity per se, there is also the entire criteria of valuation of illiquid scrips as laid down by the regulator, which also from a peer pressure perspective, does not give "leg room" to the fund manager, because illiquid scrips are valued at a discount to their market prices in most cases.

Most mutual fund vehicles are open-ended, and as we know, close-ended mutual funds trade at a discount to their net asset value (NAV) on the stock exchanges. This phenomena has resulted in no new close-ended vehicles coming into the market.

And in open-ended funds, whenever the market moves down, the investors, gripped with fear, invariably put in their redemption requests, compelling the fund managers to sell down their investment portfolio to meet the redemption cash demand of the investors. Increased supply on account of such off-loading, in a market which is already weak, causes the share prices to dip further, triggering a downward spiral.

It is a select, sophisticated, high networth individual, who will actually put his money to work in a market when stock prices are soft.

The converse also holds true when markets are rising, as we witnessed in 2000 and 2003. Money flows into the markets invariably when there is all round bullishness; the index is rising and scaling new heights; investment bankers are coming up with new issues/ideas for medium (2-3 years) and long term (4-5 years) investments. The fund managers, in logic defying compulsions, are inundated with funds to be invested in stocks at a point in time when the world is looking rather rosy and the stock prices are also reflecting future prosperity.

Ideally, fund management comprises stock selection as well as timing of the investment and disinvestment decisions. In reality however, the fund managers' role is restricted only to stock selection, while market timing, in the open-ended vehicle is done by the investors themselves, by way of their entry and exit into the schemes.

Fund managers have to put aside all personal evaluations on timing and follow the diktats of the investor body on the buy/sell decisions. The pressure of cash positions, as also peer pressure, completely vitiate any attempt to "time the market".

If we look at the structure of the mutual fund industry, not only in our country but also internationally, we observe that there are significantly more bodies selling the funds than there are people who actually run the money. It requires no great intellect to conclude that mutual funds are `sold' not `bought'.

The eagerness of a salesman or distributor selling the fund brings its own attendant pressure on the fund managers' tribe. The performance analysis done by both internal and external agencies looks at the performance of a fund manager and compares it with his peer group if not on a daily or weekly, at least on a monthly basis. And the fund manager has to continually mount presentations to rationalise his performance vis-à-vis peer group, not only to internal teams but also as and when required to external groups, distributors and even individual investors should they confront him directly. This constant comparison to the peer group results in virtually every fund manager mimicking the competition portfolio, so as to not under-perform the peer group.

Additionally, there is safety in large numbers and its easier to explain away a poor stock selection if the stock has presence across the rank and file of funds. All this results in most vehicles being mirror images of one another.

It is not to say that the fund mangers should run the money on their personal whims and fancies but there needs to be elbow room given to each individual, to bring in his own concepts and assessments and reflect them through the portfolio construction.

This would require the investors and all others to allow a realistic time frame to any investment manager to fructify his ideas into returns. Needless to mention that if these objectives are not achieved over a desired timeframe by the investors, keeping in light the realities of the stock market, they may vote with their feet.

There would be gainsaying that each one of us as an individual realises that undue pressure does not get the desired result in most situations and the investment world is no exception.

The author is Chief Investment Officer, Sun F&C Mutual Fund. The views are personal.