Sunday, October 25, 2009

The Honest Truth - Should we fire the Fund Manager?

Btw, why is it a honest truth? Does that mean it's not a dishonest truth? 

Hear this one from Ajit Dayal.
Should we fire the Fund Manager?
23rd Oct 2009

Or should the Board of Quantum Asset Management Company Private Limited fire me?

Or, worse, should investors in the Quantum Long Term Equity Fund bail out and put their money in some other equity mutual fund?

Hang on: let me tell you why I am raising these really important questions.


During the many hours of discussions and presentations of the Path to Profit across many parts of South India, I warned the audience:

"We were the first to say that the BSE 30 Index can touch 21,000 by June or July 2010. We said that when the Index was bouncing around in the 8,000 to 10,000 range. Our performance numbers have been good for a 1-year, 2-year, and 3-year periods. But, I warn you: though we were the first to make the case for a bull market, we will now underperform."

The audience gave me that strange look reserved for really strange people.

"Strange, isn't it? I stand here in front of you, predicting a bull market and then saying that the Quantum Long Term Equity Fund will not do well."

"Why? Because as value managers, the stocks we own will begin to look 'expensive'. And so we will sell those 'expensive' stocks. But we are humble enough to recognise that our selling will have no impact on the market - the stock markets will continue to rise. Remember, in bull markets fear is out and greed is back. Irrational prices will prevail again. As we sell out of stocks, our cash levels will increase. Cash earns us 4% to 5% in a year. That is useless when compared to a roaring bull market when stocks can surge 4% in a day! So, ladies and gentlemen, we will underperform. We are predicting our own death!"

Therefore, what should we do?
This is the background.
This is why I pose the question: should we fire the Fund Manager and all the research analysts?
Or should the Board fire me?

The email hit my inbox today from our internal sales team.
There are 248 diversified equity funds out there.
And the Quantum Long Term Equity Fund was ranked 248.

That's right: dead last.

I rubbed my eyes.
I sent back an email: "Are you sure?" I asked.
"Yes" was the reply, "we are last."

I had not written an Honest Truth for a long time.
Here was a great opportunity: an opportunity to tell you that we are ranked last!

Such an event may not last long. So, I better write about it and let you know about it before this historic moment slips away unnoticed by any ranking tables, unnoticed by anyone.

Table 1: Quantum Long Term Equity Fund ranks last - for the past one week!
Returns (%) 1 Week Ended October 21, 2009 1 Month Ended October 21, 2009
Quantum Long Term Equity Fund -2.12 +3.27
Category Average (Equity Diversified) +0.02 +3.60
     
Quantum Long Term Equity Fund Ranking 248 136
Total 248 248
How many funds have we done better than? 0.00% 45.16%
(Source - www.valueresearchonline.com) Returns for Growth Plan

But getting back to our prediction and discussions during the Path to Profit: we were right.
But, wow! - That was quick.
My prediction of 'underperformance' was accurate.

And the BSE 30 Index is nowhere near the 21,000 level - we still have another +21% to get there.
Our cash levels have increased. The fact sheets for the Quantum Long Term Equity Fund indicate that the Fund owned 27 stocks as of September 30, 2009 (29 stocks in August) and the cash level in the Fund was 9% (2% in August).

So, clearly the Fund is selling out of some stocks and not putting the money back in the markets.

But how do we get a -2.12% rate of return for the week ended October 21, 2009?

Table 2: QLTEF did not own the winners - for this week!
The Top 10 stocks owned by the Fund Their weight in the portfolio as of September 30, 2009 How did they perform for the week ended October 21?
HDFC 6.20% -3.8%
TCS 5.93% +6.9%
Infosys 5.55% -4.0%
HDFC Bank 5.30% -2.5%
Hind UniLever 4.48% -6.4%
ONGC 4.40% -6.1%
Bajaj Auto 4.38% -8.4%
Container Corp 4.04% -0.4%
Zee 4.03% -6.0%
BPCL 4.01% -4.5%
     
BSE-30 Index   -1.3%
     
Reliance Ind Not owned +0.2%
ICICI Not owned +0.9%
L&T Not owned -1.0%
Unitech Not owned +0.7%
DLF Not owned +9.2%
Source: Bloomberg, BSE

Owning cash hurts the upside for sure, but owning the 'wrong' stocks is what can hurt most!

For the week ended October 21st, the stocks we owned did not "rise" in price.
The stocks we did not own, did a lot better.

So, we suffered.
For that one week.

A lesson for all of us
The way stocks are researched for the portfolio of the Quantum Long Term Equity Fund has not changed.
The way stocks are picked for the portfolio of the Quantum Long Term Equity Fund has not changed.

But the way the markets price the stocks we own changes every minute!
The last time we checked, the managements of the companies we own still run the way they ran their businesses last week - or last month.

But, on some days, the stock markets love the share prices of certain companies.
And on some days it loves some other stocks!

A similar portfolio gave the Quantum Long Term Equity Fund a pretty good track record for the 1-year, 2-year, and 3-year time periods ended October 21, 2009.

Table 3: Read our Offer Document carefully to decide where to park your savings for the long term.
Quantum Long Term Equity Fund - Performance Data
Returns (%) 3 Month Ended 6 Month Ended 1 Year Ended 2 Year Ended 3 Year Ended
Quantum Long Term Equity Fund 19.38 66.76 71.63 7.9 14.42
Category Average (Equity Diversified) 17.54 61.94 64.38 -0.71 10.83
           
Quantum Long Term Equity Fund Ranking 63 71 61 22 45
Total 235 221 210 185 156
How many funds have we done better than? 73.19% 67.87% 70.95% 88.11% 71.15%
Quantum Long Term Equity Fund was launched in March 2006
Source: www.valueresearchonline.com

So, markets bounce.
Share prices jump all over the place.
But the investment thesis for us to own stocks in the Quantum Long Term Equity Fund has not changed.

The ranking numbers are - like the clouds - passing in nature.

I am sure we were ranked number one sometime...I missed writing about that!
I happened to catch our wonderful 248/248 ranking. And I write about it.

Rankings do not change what we do.

Here is what happened to those same stocks for the one day, October 22nd compared to where they ended on October 21st.

Table 4: QLTEF had a far better day on October 22nd!
The Top 10 stocks owned by the Fund Their weight in the portfolio as of September 30, 2009 How did they perform for the one day from October 21st to October 22nd.
HDFC 6.20% -0.5%
TCS 5.93% -0.9%
Infosys 5.55% +2.1%
HDFC Bank 5.30% +0.4%
Hind UniLever 4.48% +1.4%
ONGC 4.40% -0.6%
Bajaj Auto 4.38% -1.2%
Container Corp 4.04% -2.7%
Zee 4.03% +0.0%
BPCL 4.01% +0.0%
     
BSE-30 Index   -1.3%
     
Reliance Ind Not owned -2.2%
ICICI Not owned -4.1%
L&T Not owned -3.9%
Unitech Not owned -5.4%
DLF Not owned -4.9%
Source: Bloomberg, BSE

So, the stocks that hurt us because we did not own them for the week ended October 21st had a terrible October 22nd.

We have no clue why.

I have not seen the ranking tables for the one day October 22nd - if they exist - but I can wager we had a better rank than 248 out of 248!

As for firing our fund managers or the research analysts: they are really good people and very disciplined in what they do.

Rankings don't rattle them.
Assessing and pricing risk is what they do very well.
And generating returns over longer periods of time.

They avoided stocks like Reliance, ICICI, L&T, DLF, and Unitech because the risk-return reward was not attractive - or the managements are totally avoidable.

We let others boast about their rankings and their stars and "returns".
We focus on risk we wish to take and the return we wish to be rewarded for the risk we have agreed to take.

Like my late uncle sang in his song: Aadmi ache hai, par waqt bura hota hai...

The Fund manager and their research team that looks after your savings in the Quantum Long Term Equity Fund is good - as is the process - the times are strange.

Or at least the week ended October 21st was strange.

So, my appeal to the Board of Quantum AMC is: please don't fire me.

And my appeal to you is: If you wish to double your money in a day - or are scared to invest in a Fund that is willing to take it on the chin once in a while for correctly assessing long term risks of buying certain stocks - then, please stay away from the Quantum Long Term Equity Fund.

But if you wish to make sensible long term returns - and don't get rattled by this 248/248 ranking for one week (just as we are not) -


Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)
Quantum Long Term Equity Fund Quantum Gold Fund
(NSE symbol: QGOLDHALF)
Quantum Liquid Fund
Why you
should own
it:
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 20% Keep aside money to meet your expenses for 6 months to 2 years

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"

Note: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt Ltd and Quantum Asset Management Company Pvt Ltd.. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited. To write to Ajit, please click here.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The authors, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use for the web site
©Equitymaster Agora Research Private Limited 2007-08

Posted via email from Ranjan's posterous

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