Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Ring out growth… - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Mar 1, 2001

    Ring out growth…

    ..and ring in value. This is the new mantra chanted by equity fund managers in the New Year. But is this serious value investing or just another attempt at booking a quick profit?

    Most equity fund managers ended last year by showing the door to new economy stocks. And in a surprising move, they embraced the old economy in a hurry. This isn’t exactly surprising when you look at the NASDAQ in the last quarter of 2000, a picture of gloom and a reflection of the dotcom doom. With the NASDAQ’s rather precipitous fall, domestic software stocks also caught the proverbial cold and investors dumped them rather frantically. Fund managers followed suit and exited from software bigtime.

    For most investors including fund managers, exit from software was more instinctive than intelligent. It was more reactive than proactive. For instance, if the reasons for buying software were purely fundamental, then how does it matter if the NASDAQ crashes below the earth. Infosys’ superior management and excellent work ethic don’t take a knock just because a few hundred dotcoms crash and NASDAQ is not comfortable with that.

    In any case, Investors decided to fill the void created by software by lapping up old economy stocks – cement, petroleum, engineering (banks in any case already existed in equity portfolios).

    Disillusioned with software, fund managers also took to old economy stocks. These were the stocks that they had shunned for most last year, in favour of software. Now that software fell out of favour, they were left with old economy for consolation. Firming up of cement stocks redeemed them in the eyes of their investors. With news of an impending disinvestment in public sector petroleum companies, there was more cheer for fund managers and old economy allocations rose further.

    Over the last few months we have fund managers waxing eloquent of value investing and its immense benefits. It will be interesting to know if value investing is back by accident or by choice. Fund managers had to get out of the more exciting growth (technology, telecom, media) stocks. Likewise they had to embrace the staid value stocks (cement, petroleum, engineering). So in essence, there was little option for them other than to venerate value investing. So value stocks which were given the boot all along, are on a comeback trail, but only because growth stocks (software, telecom) have lost their gleam.

    Fund managers are increasingly getting more and more reactive as opposed to being proactive. When you look at fund portfolios, we find most fund managers ‘chasing’ stocks rather than ‘investing’ in them. There is hardly any direction. Portfolios are churned actively adding to volatility and transaction costs. Yesterday’s star stocks are today’s duds, they are given the boot and are replaced just as quickly. As reported by a business daily, when a fund manager from one of the leading fund houses in the country was asked, ‘Your portfolio in early 2000, contained scrips such as Danlaw Technology, Magic Software and Millennium Infocom. What future do you see for such companies and their share prices?’ his evasive reply was – We currently do not own any of these shares.’ We have seen plenty of such replies in the last year.

    Take for instance, pharma stocks and fast moving consumer goods (FMCG) have crept back into fund portfolios, after being cold-shouldered for most of last year, as fund managers see increasing potential in pharma and FMCG stocks. Backed with research and company visits, fund managers are supposed to act with foresight and not hindsight. In other words they should have been in these stocks last year as the potential existed even then, and prices were far lower. If they had been in them last year, there would have more upside. On the other hand, they are getting out of software now because they see Indian IT being pulled down by the US slowdown. This is also something that their analysts should have told them earlier.

    Also take for instance the Unit Trust of India (UTI), India’s largest mutual fund (67% market share as on December 31, 2000). In 1999, when investors were selling everything and buying technology, media and telecom (TMT) stocks, UTI was in old economy. Then like the sleeping giant it is, it bought software big time when prices had already peaked. Now like the others around it, it is selling software and buying old economy stocks. This is another instance of a fund chasing stocks, as opposed to investing for the long term. But one cannot say too much to UTI because one never knows if its investing on its own accord or buying/selling on orders of the High Command.

    Another common practice that fund managers adopt to hike returns is exiting a stock at a higher price and then re-entering it a few weeks later at a lower price. Here again investment is made purely for price consideration and fundamentals take a backseat. Fund managers are paid fees because it is assumed that they are more informed and function on a more updated knowledge base and not because they trade more smartly than the average investor. If it is a matter of simply tracking stock prices and buying low and selling high, then even a lay investor can graduate to a fund manager!

    However, to be fair, fund managers are rarely allowed to make investments without any pressure. Investors are constantly breathing down their necks monitoring their net asset values (NAVs) closely. We asked Sunil Joseph (President, Director – Dundee Mutual Fund) – ‘Shouldn’t a fund be taking a 2-3 year view on a stock?’ To this he replied – ‘You must understand that the Indian investor will never allow us a 2-3 year horizon. The investor and the mutual fund looks at it daily. If you are a portfolio manager you don’t have that luxury anymore of investing for the long term.’

    Right now fund managers are singing the value tune and claim to be investing for the long term. Fundamentals are claiming their place under the sun, finally. But it remains to be seen if this is a serious attempt at fund management or just another screen to exploit trading opportunities.



    Equitymaster requests your view! Post a comment on "Ring out growth…". Click here!


    More Views on News

    The Right Financial Advisor Is Around the Corner (Outside View)

    Mar 10, 2016

    An opportunity to find an impeccably trustworthy and competent financial guardian is in the offing.

    Why financial planning should be dull and boring (Mutual Fund Corner)

    Feb 29, 2016

    Most financial planners come out as whiz kids who throw around financial jargon. But financial planning can be actually easy, provided one follows a disciplined approach.

    What Are E-Wallets And How To Use Them (Mutual Fund Corner)

    Feb 12, 2016

    PersonalFN highlights the benefits of parking a portion of your expenses in e-wallets and using them efficiently.

    Is Consumption Boom Over In India? (Mutual Fund Corner)

    Feb 2, 2016

    Mutual funds take a bearish call on the FMCG sector. The sector has started playing out due to a combination of slower growth and expensive valuations.

    How to Find a Saint Amongst Sinners? (Mutual Fund Corner)

    Feb 1, 2016

    Ethical practices help build long lasting relationships, and healthy long-term business relationships are often mutually rewarding. But PersonalFN is of the view that the financial services industry in India seems to have forgotten this.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    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.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. 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. 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

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms