»5 Minute Wrap Up by Equitymaster

On This Day - 8 DECEMBER 2011
What top fund managers do not want you to know...

In this issue:
» Minority shareholders cannot be taken for granted
» Citibank cuts more jobs
» Hold on FDI retail has not gone down well
» Eurozone sees a drop in commodity demand
» ...and more!
----------------------------- Now get free daily updates on Global Economy! -----------------------------

Will Italy be able to get back on its feet again?

Will Euro die faster than the Dollar?

Will China now replace US as the new superpower?

Know all that's going on in the global markets through the free daily financial e-column The Daily Reckoning.

Authored by Bill Bonner, a three-time New York Times best-selling author, the Daily Reckoning is published in 3 languages and is read by millions of people across the globe.

Sign up now for free updates on global markets!


While choosing certain mutual funds over many others, two of the factors that we look at are the returns generated by the fund in the past and the performance and reputation of the fund manager. Indeed, as far as the latter parameter is concerned, investing in funds that have 'star managers' can appear a very attractive proposition indeed.

Does that mean that star managers have always been consistently able to perform above average? Not really. If you look at the global mutual fund industry, big fund managers such as Bill Gross, John Paulson, Bill Miller among others have fared rather poorly in recent times. This has laid bare the fact that life is tough even for the most skilled manager and with markets becoming more dynamic, most fund managers are finding it tough to adapt.

During times when the fund manager does not perform, can that be pinned down to bad luck? Certainly, fund managers will not attribute strong performances to good luck but to their skill. This means that underperformance cannot be entirely attributed to bad luck but has a lot to do with human error. According to a report published by Absolute Return Partners, a survey of UK funds showed that out of 1,230 funds across 12 different strategies, only 35 fund managers performed consistently enough to be placed in the top quartile in each of the last three years. So why in recent times, are fund managers finding it increasingly difficult to outperform on a consistent basis?

For starters, much of the underperformance in the decade gone by could be a result of the over optimism in the 1990s. Indeed, many believed that equities as an asset class would always go up in the long run and are paying a heavy price for the turn of events now. The current global financial crisis has only added fuel to the fire especially since it looks like a very long time before the developed economies get back on their feet. Herd mentality has also led to funds not being able to deliver. Given the scale of the recent crisis and the uncertainty it has caused, many investors who had an appetite for risk have become risk averse and the simultaneous sell off across all share classes has rendered the technique of diversification meaningless.

At the end of the day investors, when they choose to invest in mutual funds, need to do a thorough analysis of the funds that they want to put their money into. Selecting a fund solely on the basis of its 'star manager' may not be prudent. The idea is to have your own investment strategy in place and then select those funds that meet your investment objectives. Also, the notion that funds having a high portfolio turnover tend to generate more returns does not hold true. High turnover portfolios only pile on costs without giving strong returns in the future. Moreover, it only increases volatility and that benefits no one. The days when one could just park money into mutual funds and let the fund manager do all the work without the investor having to do much are gone. Given the times that we are in, investors have to be as vigilant when they invest in mutual funds as they would be when investing in stocks of individual companies.

Do you think that investments should be made in mutual funds solely on the basis of star fund managers? Share with us or post your comments on our Facebook page / Google+ page.

 Chart of the day
India's GDP growth has been of much discussion in recent times. What with inflation remaining stubbornly high and government finances being out of order, slowdown in growth has been the unanimous verdict. And that has indeed been the case. Most of India Inc has seen profits dwindle and India's GDP has also displayed a decreasing trend over the quarters. Having said that, as today's chart of the day shows, despite a slowdown in growth, India still ranks high behind China as far as GDP growth in the third quarter of 2011 is concerned.

Data source: Economist

That ensuring a company's financial reporting is true and fair cannot be left to auditors has been proven beyond doubt after the Satyam scam. But it is not just the regulators who need to keep themselves alert. Investors, who should ideally see themselves buying a pie of the business, should be as cautious. Board of directors of innumerable companies have been known to take wrong decisions one after the other. Others are known to collude with those involved in malpractices. In most cases the minority shareholders are the last ones to smell the rat. For most of them just keep focusing on the stock price until it crashes in front of their eyes. Shareholder activism has picked up momentum lately in India. But we need to go a long way for ensuring that company management does not take minority shareholders for granted. Other stakeholders, that include employees, customers and vendors could often prove to be the most reliable sources of authentic information on the company. But more importantly, the board of directors representing the company, should be made more accountable to minority shareholders.

From being the biggest wealth creators, financial firms have now become the biggest job destroyers. 2011 seems to have been hit the hardest. Global financial firms have cut more than 200,000 jobs this year, up from about 58,000 in 2010. It even trumps the 174,000 job losses seen in 2009, according to Bloomberg. Citibank recently announced 4,500 job cuts amounting to 1.7% of its workforce at the end of the third quarter. It plans to take a US$ 400 m charge on its income statement for this. Bank of America also plans to cut its staff by 30,000 over the next few years. But, this may just be the tip of the iceberg. The challenging economic environment, the Euro crisis and regulatory concerns are still huge risks. These firms are finding it increasingly difficult to be profitable. Thus further pain is surely on the horizon for these companies and their shareholders. The global financial crisis seems to be seeing a second coming.

There is nothing more frustrating than confusion and uncertainty. As human beings we get irritated when people decide on one thing and then reverse their decision at the blink of an eye. So it is little wonder that the international business community holds the same irate view of the Indian government. The government's recent decision to put the FDI in retail on hold to garner popular support has not gone down well with them. As announced by the CEO of General Electric (GE), the government is sending confusing signals to the business world. Such moves lead to the business community having to rethink their business plans in the country. The policy inaction and evasiveness have led to a drop in business confidence in the country. And the government cannot afford to do this. The government is already facing an enormous fiscal deficit. They badly need the foreign funds to bridge the much needed gap in investments. These investments are essential for the country's long term growth. But unfortunately the government prefers to listen to a select few influential voters; rather than relying on its own competence and catering to the needs of the country.

If you find a harmless little lion cub bumping into you, do not underestimate the impending danger. Because it is most likely that the lioness would be within close quarters. Even more, a pack of lions wouldn't be too far away. Many commodity traders would regretfully identify with the above story. The little lion cub that we mentioned above is a reference to Greece. When the debt crisis first hit Greece, a lot of commodity traders were quite assured that it wouldn't have any meaningful impact on commodity demand. Plain logic tells you that a country that constitutes less than 0.5% of the aggregate world oil demand is essentially inconsequential. But these traders were careless enough to not consider that Greece may not be the only one. Today the debt contagion has spread into several other economies and has gripped the entire Eurozone in a very severe crisis. Now this region as a whole is one of the most important sources of commodities demand. It accounts for about a quarter of the global consumption of oil and nickel, and about a sixth of other metals such as copper. There is ample evidence that demand for commodities has dropped in the Euro region. Did we not tell you the pack of lions must be around?

In the meanwhile, the Indian stock market continued to trade weak on account of selling pressure amongst heavyweights. At the time of writing, the benchmark BSE Sensex was trading down 289 points (1.7%). All sectoral indices were trading in the red led by realty, capital goods, metal and oil & gas space. Jaiprakash Associates and Hindalco were seen losing the most amongst blue chips. All major Asian indices performed weak today with stock market from Singapore leading the pack of losers.

 Today's Investing Mantra
"The stock market is filled with individuals who know the price of everything, but the value of nothing." - Philip Fisher

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407