Should investors really want A Large One? - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
Should investors really want A Large One? A  A  A
PRINTER FRIENDLY | ARCHIVES
26 MAY 2010


Background: The sub-committee appointed by SEBI for reviewing the eligibility norms for the mutual fund industry have recommended that the minimum net worth should be raised from Rs 10 crore to Rs 50 crore.
SEBI is inviting public comments on this till June 14th and emails can be sent to YogeshE@SEBI.gov.in


If there is one lesson that we should have learnt from all the shenanigans of the geniuses in the financial service industry - whether they operate on Dalal Street or on Wall Street - it is this: size is not any indication of safety.

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AIG was the largest insurance company in the world.
Lehman, one of the largest Wall Street firms.
Fannie Mae, the largest owner of home loans.
All bust - all rescued by the US government.

UTI was the largest asset management company in India. It went bust.
ICICI was the largest private sector bank in India - and had to be bailed out by the RBI after the Lehman crisis.
The largest real estate companies all pretty much went bust and had to use the money from the public sector banks to be saved.
The mutual funds who issued the most FMP rubbish paper backed by rubbish real estate assets were some of the largest mutual funds in India. And they had to be effectively bailed out by the Reserve Bank of India.

Size, my friends, is not a guarantee of satisfaction.
Not even in the hallowed field of finance that is increasingly being run as a "milk your savings business".

But the sub-committee on mutual fund eligibility norms proclaims loudly" "Mine is a large one".
And brings an envious silence in the room.

So goes the joke about the man ordering a drink in a bar.

The Viagra pill does not do much good for the brain
Look around the magazines and newspapers sprawled across your table. They all have articles on companies that are the worlds largest and the country's largest.

Large must mean "successful".
Therefore, it must be newsworthy.
Therefore, they need to be praised in the press.

Take a look at your portfolio of mutual funds: you probably own many mutual funds launched by the large fund houses.

They may be good fund managers, please don't get me wrong.
But they are certainly large managers.

Just because you are large, it does not mean you are good.
Just because you are small, it does not mean you are bad.

Our email in-box is flooded with all those ads for Viagra.
A power-packed performance is promised.
Do you have a small packet, we are asked?
The guilt of the Indian mind and our inherent shyness, leads us to delete those emails.

But while we may be shy of buying the "largen-ing" stuff those emails offer, the Viagra syndrome seems to have influenced how we go about investing our financial savings. And buying mutual funds.

The distribution channel's persistent effort to make you buy the tried and tested is a source of comfort.

Look at your portfolio of mutual funds again. Looks like you can also claim: mine is a large one.

The illusion of size
There is safety in size.
There is comfort in largeness.

Really?

Well, we have an alternative theory: size is irrelevant in the business of investment management.

We launched the Quantum Long Term Equity Fund in March, 2006.
We were small then. We collected Rs 10.7 crore at launch in March 2006.
We still are small.
We have less than Rs 50 crore in the Quantum Long Term Equity Fund.

But we have our track record: our performance numbers have been fairly consistent and we tend to be in Top 25% (top quartile in ranking jargon, if there are 100 funds we will be in the 1 to 25 range) for many time periods.

I know we have out-performed many funds that are much larger than us. The fact is that they have the size, we have delivered the satisfaction.

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When Quantum AMC launched Quantum Long Term Equity Fund in March 2006, the 5 largest equity funds in terms of Assets under Management were:

1) Reliance Equity Fund, Rs 5,820 crore
2) Fidelity Equity Fund, Rs 3,096 crore
3) HDFC Equity Fund, Rs 2,815 crore
4) Franklin India Flexi Cap, Rs 2,283 crore
5) Franklin India Prima Fund, Rs 2,455 crore
And there was Quantum Long Term Equity Fund with Rs 10.9 crore of total AuM. We did not use your money to pay distributors; we did not use your money to run a national advertising campaign.

But how did we, ahem, perform?
Let's say you distributed Rs 100 equally and evenly in each of those 5 Funds - Rs 20 in each Fund.
Well the chart shows that the Quantum Long Term Equity Fund (the blue line) has done pretty well against the largest funds.
The significantly larger size of money with the "5 largest" did not translate into a "performance kicker".

There is more to life than size.

Chart 1: Size does not hinder - or help - performance

You made them large
And note that these funds are "large" because you gave them your money.
Your money.
Had you put your money into Quantum Long Term Equity Fund, we would have been a little larger (and still performed!).

Investors clicked that link in the email which advertised Viagra, which advertised size.
Maybe it is time for you to "unclick" that Viagra link and focus more on other things that really matter - that make a difference to performance.

Things like a disciplined research and investment process.

Or - as we have adopted in Quantum Asset Management Company - the desire to lower your costs by not paying commissions to distributors.

And a desire to launch simple products that make sense for you - the investor - and are not launched merely because it is "fashionable" to launch them. (Uh, anyone remember what happened to the infrastructure funds that were so "hot" a few years ago?)

Table 1: Being king size is not a criterion for satisfaction
Name of largest equity fund as of March 31, 2006 BSE 30 Index Quantum Long Term Equity Fund Reliance Equity Fund Fidelity Equity Fund HDFC Equity Fund Franklin India Flexi Cap Fund Franklin India Prima Fund
AuM of these funds as of March 2006 (Rs crore) N.A 10.9 5,820.1 3,096.0 2,814.7 2,822.5 2,454.9
AuM of these funds as of April 2010 (Rs crore) N.A 52.2 2,052.7 2,871.0 6,025.4 2,270.1 967.6
Compounded annualised returns from March 13, 2006 till May 21, 2010 for growth option 10.54% 16.51% 8.37% 15.51% 16.88% 11.56% 6.14%
1-year Ranking based on Value Research as of May 21, 2010 N.A 23/233 225/233 63/233 31/233 123/233 37/233
2-year Ranking based on Value Research as of May 21, 2010 N.A 11/210 128/210 31/210 8/210 56/210 65/210
3-year Ranking based on Value Research as of May 21, 2010 N.A 15/175 115/175 56/175 13/175 77/175 105/175
Source: AMFI/Value Research

A detailed analysis of Table 1 above shows that only 1 of the "5 Largest" funds have done better than Quantum Long Term Equity Fund.

The smaller Quantum Long Term Equity Fund has out-performed 4 of the "5 Largest Funds".

"Largeness" is not an indicator of good or bad performance - just as "smallness" does not guarantee a good or bad performance.

One should invest in a fund, not because of size, but because it matches your needs and your ability to take risks.
Invest in a fund that is focused on investment and research processes - and assessment of risks - not because it is large.

Having a Rs 50 crore net worth is not a rationale criterion for setting up a mutual fund business.
It stinks of a desire to create a closed club to pounce on your "share of wallet".

And this recommendation deserves nothing but contempt from SEBI, from AMFI, and from the body of investors who have been misled with myths about who should manage their savings over the past 15 years.

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"


Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at 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. To write to Ajit, please click here.


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10 Responses to "Should investors really want A Large One?"

Ajit Dayal

Jun 7, 2010

When we launched Quantum Long Term Equity Fund in March 2006, Reliance Equity Fund was largest equity diversified fund on the basis of AUM. As per data available with AMFI, Reliance Growth Fund’s AUM surpassed Reliance Equity Fund’s AuM in June 2007. Since we are comparing the returns of the funds where investors had invested most of their money (hence, the 5 largest) at the time of the launch of Quantum Long Term Equity Fund, it is right to consider the returns for Reliance Equity Fund for comparision and not Reliance Growth Fund. We are not trying to prove that Quantum as a fund house is the only fund house with good returns and we have no desire to “sterilise” any data - the point of the article is that size alone is a totally meaningless indicator of how well a fund will perform. Thanks.

Like 

Pramod

Jun 5, 2010

Hi,
As somebody already pointed out, Reliance Growth fund was one of the biggest funds since 2005 till today.I bet it was bigger than Prima so does it deliberately excluded because it has shown a stellar performance.

Like 

Sharad Kapadia

Jun 4, 2010

Hi Ajit,

Good one at that. But what is the information about
those competing funds who have performed better than
Quantum? We should know what strategy they have
applied that placed them in upper slot.

Everyone wants a share of the investor's pie. But it
would make interesting reading if we also know about
the Quantum's portfolio of investments, how much and
what type of churning is done over the years.

Like 

Kedar P

Jun 3, 2010

Is this rule for new AMC applicant or it is applicable to existing AMCs also?

Like 

Priyanka

Jun 1, 2010

You are right. But then SEBI is unnecessarily overactive, where it need not be. I can only hope that better sense prevails and they take decissions based on merit rather than on extraneous matters.

Like 

sunil

May 31, 2010

What about Reliance Growth Fund. I think it is top most performer in the last five years and having very huge size.

Like 

Santosh

May 28, 2010

Perfomance & consistency is what matters end of the day. People like me who lost money having invested in Jan'08 will apprecitae the numbers you mentioned in this article.

Like 

hafis

May 27, 2010

SEBI might have evaluated your (EM's) recent IPO recommendations and their performance!!!!. Event you have forgotten the basic principles while evaluating business environment of recommended company and later you (EM)came with another report post listing & afer huge fall without any justification.

Like 

Srinivasan

May 27, 2010

Ajit,

Yours is a voice in the wilderness. I sincerely hope it gets heard.

kind regards

Like 

Param

May 27, 2010

Ajit, Does Quantum really need to be worried.
I reviewed the paper - CoreCommittee.pdf and Pg 13 states
===
2. Distinctions can be made by product types offered by AMCs if
found practical; for instance an AMC focusing only on exchangetraded funds need not have a large distribution network and the infrastructure requirements that go with it. Hence, an exemption from the net worth requirements can be explored
===
Surely this indicates that some fund company dealing with ETFs has been able to bribe the SEBI committee to get a preliminary waiver. All you need to do is to bribe them to include funds without a distribution network (e.g. Quantum) to be included in this list. Simple...
Regards, Param

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