It pays to know your fund manager

Aditya Shah | Updated on November 29, 2020 Published on November 29, 2020

He should have the ability to independently think and differentiate himself from the herd

One of the most important aspects when analysing a mutual fund is the quality and depth of the fund manager. The decisions that the fund manager makes will ultimately decide the returns the unit holders make.

There is no strict parameter available to decipher the quality of the mutual fund (MF) manager. However, here we lay down some key points that investors can take into account to identify the quality of the fund manager.

MF portfolio

The first and most important of all is the analysis of the Mutual Fund Portfolio. It is the constitution of stocks or the underlying portfolio that provides vital details about the strategy employed by the fund manager. Many of them are constrained to follow the momentum strategy. This results in chasing high beta or hot stocks/sectors for short-term returns without paying much attention to the fundamentals of the company.

Churn rate

Secondly, the churn rates. It is defined as the number of stocks that the fund manager sells during the year to buy new stocks. Many actively managed mutual funds have very high churn rates. For instance, Edelweiss Large Cap Fund has 356 per cent churn, Taurus Large Cap equity - 119 per cent, Aditya Birla SL Pure Value - 156 per cent. Churn rates provide a direct understanding of the conviction the fund manager has on the stocks.

Track record

Next, the historical track record of a fund manager. This provides vital clues on the ability of the fund managers to sustain outperformance over a long period. In a 10-year time horizon, both an economic up-cycle and down cycle play out . According to BSE data, 61.34 per cent of all large-cap fund managers underperformed the S&P BSE 100 index over 10-year period.

Lastly, a fund manager must have the ability to stick to his strategy and not short-term chase fads/movements which may not work well in the long term. For example, during the Covid-19 crash in March 2020, most fund managers had sold financials at rock-bottom valuations. But most of the financials are now making lifetime highs. Similarly, before Covid-19 crisis, most of the fund managers were underweight on pharma. Most changed their stance now as they were missing the huge upside. They thus rushed to buy pharma stocks at any valuation.

The writer is CIO, JST Investments