Should Fund Houses Know More Than Small Investors? - The 5 Minute WrapUp by Equitymaster
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Should Fund Houses Know More Than Small Investors?

Jul 8, 2016
In this issue:
» Why do stocks at 52 week highs make newspaper headlines?
» Is earnings upside here to stay for India Inc?
» Our theory on Oil prices
» ....and more!
00:00
Tanushree Banerjee, Co-Head of Research

A reckoning of companies that are transparent to investors is great idea. After all shady operations, corrupt managements and opaque deals have destroyed millions of shareholder wealth in the last few years. Therefore, apart from looking for solid managements, investors want to buy companies that talk to them.

The regulator has mandated companies disseminate as much information to the public as possible. The annual general meeting (AGM) is meant to be a tough Q&A session between managements and minority shareholders. Press releases and online presentations are meant to provide an objective view of fundamentals and past performance.

But how many small investors actually benefit from this?

The Economic Times recently lauded a few companies for their honesty and transparency. The outcome was from a survey of institutional investors. This would include mutual funds, pension funds, insurance companies, banks, etc.

No doubt some of the companies deserve to be on the list. We are not contending that.

What bothers us is that these surveys are often restricted to large investors. And large investors matter much more to the companies in question than retail investors. No one bothers asking the small individual investor whether he has access to information as and when required.

Our experience with management meetings has been mixed. Some companies willingly agree to meet to share their long-term perspective despite knowing that our subscribers are small individual investors who are unlikely to make a big difference to company share price. But many other managements refuse our request outright saying they only meet with institutional investors.

It shouldn't be surprising then that companies that are in fact opaque get good marks for transparency from institutional investors. It works well for both parties: Selective transparency is typically benign for the company's stock price.

The small shareholders of such companies need to be content with the information made available to them as per regulatory mandate. And that information usually means that, in the case of an upside, the small shareholder will be a late entrant. Or, in the event of a crisis, the institutions get an exit opportunity well ahead of the small investor. Either way, selective transparency always works against the small investors.

That's why, irrespective of the potential upside, we prefer businesses that talk to small and large investors alike. We believe small investors are entitled to know as much about the companies they own as the large investors do.

Do you invest in companies that do not offer information to small shareholders? Let us know your comments or share your views in the Equitymaster Club.

01:50

For every winning stock a person owns, he's missed out on scores of others. Hundreds of mid and small-cap stocks have become multibaggers over the years, but it's practically impossible to have made money on all of them.

Even Buffett admits to 'errors of omission'. We are all mere mortals after all.

A list of stocks at 52-week highs usually inspires regret.

But a 52-week high is neither the beginning nor the end of a stock's journey. It just makes for good newspaper headlines.

And rather than regret, the 52-week high should inspire curiosity and the desire to get better. What caused the error of omission? If it was ignorance, perhaps you need to be more alert and develop your analytical skills. But if the fundamentals of the company are uninspiring, have given the stocks a miss would probably make you feel better.

Either way, next time a newspaper headline talks of stocks scaling 52-week highs, don't regret looking at the list. Indeed, look at it as an opportunity to hone the skills a long-term investor needs. Doing so can certainly ensure that one owns not just the best stocks but the best businesses!

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02:30 Chart of the day

The last few quarters have been challenging for Indian companies. Today's chart of the day, clearly highlights this. The sales of companies in the Nifty 50 index declined for most of 2015. The growth in the sectors like metal, pharmaceuticals banking and capital goods particularly came under pressure. However, Since the start of 2016, there has been a stark shift in the trend. The first sign of topline growth shifting towards positive trajectory was seen in the March quarter. But how will things move going forward?

Will Sales Growth Continue for India Inc?


Well, a regular 5 Minute WrapUp reader has undoubtedly read about Rahul Shah's prediction that the earnings of Sensex companies could go up as much as 70% in two to three years.

But when it comes to selecting stocks that can benefit from the upside, one needs to be selective about not just the sales growth but the sustainability in profit margins too.

We published a special report - Sensex 40,000: 4 Stocks to Profit from the Coming Stock Market Wave - to talk about exactly such opportunities.

03:20

Saudi Arabia and Russia are known for being world's largest oil producing nations. If a report by Rystad Energy, an independent oil and gas consulting firm based in Oslo is to be believed, they may soon lose their titles. According to the report, the US currently holds 264 billion barrel of recoverable oil reserves. The country has overtaken the leading oil producing nations Saudi Arabia and Russia by 52 billion barrels and by 8 billion barrels respectively. What is more, according to Rystad, the surge in US' oil reserves may not be over yet. The big driver behind the surge has been disruptive technologies like hydraulic fracturing (or "fracking"). These technologies have unlocked billions of barrels of oil from America's shale deposits.

As per Rystad's analysis there are more than 2 trillion barrels of recoverable oil reserves around the world today. That's about 70 years of production at current rates. Further with the improvement in technology, the number is expected to go upwards.

We believe that if there is one sector that is most susceptible to speculations, it is oil and gas. Remember, the study of Peak Oil? It is the point in time when the maximum rate of extraction of petroleum is reached, after which it is expected to enter terminal decline. In the year 2014, it was expected that the oil will be in decline after 2050. It was nothing less than a doom's day scenario. When oil price was its peak few years back, few would have questioned the theory.

So what happened to the peak oil?

Oil prices declined thanks to oversupply. And with the change in market dynamics, expert opinions on future of oil prices changed too.

We believe such studies and opinions should be taken with a pinch of salt.

Richa Agrawal, the research analyst tracking the Oil and Gas sector for us, wrote this in one of the editions of The 5 Minute Wrap up.

  • The oversupply by OPEC has brought shale producers to their knees. High-cost producers with huge debt on their balance sheets are getting squeezed out of the market. Oil companies in the US are going bankrupt and are on the verge of closure. Shale projects are lying idle.

    Seeing all this carnage, we wonder if new projects will be undertaken and if anyone will be willing to fund capital-intensive shale production even when oil prices rise.

Therefore, whether it will be US shale or OPEC that will cap oil prices is not known to us. However, we are not believers in either of the theories when it comes to researching oil stocks.

04:45

After opening on a flattish, the Indian indices have moved below the dotted line and languishing in red. At the time of writing, the BSE Sensex is trading lower by 63 (down 0.17%) and the NSE Nifty is trading down by 15 points (down 0.17%). The BSE Mid Cap index is trading up by 0.15%, while the BSE Small Cap index is trading lower by 0.14%.

04:50 Investing mantra

"Over the long term, the stock market news will be good. In the 20th century, the United States endured tow world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Bhavita Nagrani (Research Analyst).

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3 Responses to "Should Fund Houses Know More Than Small Investors?"

rohit

Jul 9, 2016

your article deal with fund houses.its good thinking
have the fund houses and fund managers thought of the portfolio items they hold in each scheme?
most of the fund houses are in investment in shares of tobacco business. i will not mention the stock. are this fund houses giving benefits to investors through cancer causing products?
amazingly many fund houses are having investment in tobacco company for innocent funds like children funds.
this funds can easily be distributed all over other products.

also please quote some other expert besides Warren buffet because i feel the investment strategy of buffet possibly does not fit Indian sentiments.

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Kishore M Mulay

Jul 8, 2016

Fund houses normally would get priority as compared to smaller indvidual share holders. Its natural. Size does matter. Transparency with all shareholders is not possible. It is a theoretical concept to be seen in an ideal world. In reality ideal world does not exist.

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sharad ruparel

Jul 8, 2016

all investors should get all info of a listed co at the same time.cos should give max infos in a press release with qtly results and hold concalls prefenerably post mkt hours and trascript thereof should be put up within two hours.there should be no one to one meetings with funds and if there is any meeting the same should be recorded and put up for public.what is happening now is no less than insider trading

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Equitymaster requests your view! Post a comment on "Should Fund Houses Know More Than Small Investors?". Click here!
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