Is your fund manager stupid? - The Honest Truth By Ajit Dayal

Is your fund manager stupid?

12 FEBRUARY 2016

Every time there is a market collapse and retail investors get burned, the overpaid fund management industry clicks and clucks and tells the media how the retail investor always buys at the top and sells at the bottom. The retail investors, they imply, are dumb.

Finally, the behaviour of the majority of investors is a contrary but reliable indicator. In my experience of 20 years and three market cycles, retail has either not been a buyer or has been a net seller at close to bottoms, and a net and significant buyer at close to peaks. This is unfortunate but true.

Invited to attend a discussion on this many years ago, I was furious at this implied allegation of "dumb retail" and countered that it was the AMCs, the fund managers, and their army of salesmen who were to blame.

The investor did not land up at the doorsteps of the AMC by magic: he was lured there.

When stock markets rise and the TV anchors speak with a level of excitement that would make Sunny Leone's heavy breathing sound boring, it becomes easy for the salespeople to sell equity funds.

The behavior of the majority of the investors is directly correlated to the enthusiasm of the well-oiled salesperson!

The distributors and salesmen were mis-selling to their clients, the retail investors.

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The blunder of the clients is to believe that the financial services industry is out to look after the interests of the clients.

As those who have watched 'The Inside Job' or 'The Big Short' know, nothing could be further from the truth.

Basically, the fund management industry (and the larger financial services industry) is a dishonest industry driven by self-interest and thriving on an opaque distribution payment system.

Now that the stock markets are off the Modi Magic and are heading into a tailspin, I bet that the fund managers in this compromised and ethically starved industry are dusting off their old commentary for a fresh replay of the "stupid investor" story.

Graph 1: Was your smart fund manager so dumb to be fooled by these bogus estimates of earnings?Or just plain dishonest and lured you into stocks to boost their AuM?

So, Dear Reader, before you start hearing the "retail investor is stupid" slogan, may I suggest you send the above graph to the fund manager of your choice and ask him/her the following questions:

  1. Did you believe these mythical and hyped earnings estimates?
  2. If you did, you got conned. Admit it.
  3. If you did not believe these hyped up earnings estimates, did you issue any communication to me about the false expectations and warn me about an overblown market running on hyped expectations of earnings?
  4. Are you stupid, are you smart, or are you just plain dishonest?

Analysts and fund managers make errors of judgement: that is the risk of our business.
We need to acknowledge those errors and improve at our profession.
But what we must not do is to deliberately mis-lead our clients.
That is a breach of fiduciary responsibility.

Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)

Quantum Long Term Equity Fund and Quantum Equity Fund of Funds Quantum Gold Fund
Quantum Liquid Fund
Why you
should own
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% in total in both; Maybe 20% in QLTEF and 60% in QEFOF 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"
Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is Founder of Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. 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 author, Equitymaster, 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 of the web site.

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4 Responses to "Is your fund manager stupid?"

Narasimmamurthy Radakrishnan

Feb 27, 2016

1) Upfront nobody tells the first time investor/or they are not aware that in short term the market may give negative returns.
2)Once an investor is singed by this he goes away from mutual funds never to return
3)But due to difference in approach ULIPs are sold successfully and the poor investor may not be able to decode the annual results to decipher the performance of his fund. Is it not a curious case of dichotomy
4)Investor does not have the appetite to remain invested for,say,4-5 years to tide over the volatile conditions
5)There is no standard way by which investor can evaluate his fund;much less his portfolio
6)MF industry has an axe to grind as evidenced by glut of NFO s
7)Financial literacy for mutual funds is a must



Feb 14, 2016

Excellent sir !! Financial Industry is headed by cheaters, investors should not impressed by their ot their sales persons style.


Vivek Raut

Feb 12, 2016

Environment plays a important role in growth. Suppose this year we have perfect season, no one can stop us from growth. No one is stupid, it's the value of product during that particular time. People buy product at high valuation but shy or afraid to buy same product when it goes down. So buy on conviction independent of eps.


Purniah B

Feb 12, 2016

I have retired from Government service and am 63 years old.

I put Rs 10000 in Kothari Pioneer Mutual fund and after it was taken over by Franklin Templeton, I have got excellent returns. (I am in dividend reinvestment mode). I have redeemed Rs 1.5 Lakhs and yet it stands at almost Rs 3 Lakhs. All for Rs 10000 in 1993!

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