The "con" in conference. - The Honest Truth By Ajit Dayal
Investing in India - Honest Truth by Ajit Dayal
The "con" in conference. A  A  A
29 MAY 2008

I have spoken at quite a few conferences in quite a few cities over quite a few market cycles. And I have attended many more as a listener.

And I have come to the conclusion that there are two kinds of conferences:
     1) Those that stay silent on what the speakers don't want you to know; and
     2) Those where the speakers are willing to tell you what you should know.

And there is no better place to test the relevance of The Honest Truth than at a conference. And I am happy to say that the relevance of The Honest Truth as a medium of an "honest truth" is alive and kicking.
Kicking wildly, actually, waiting to be let loose against all the lies, half-truths, and the statistical truths that circulate out there.

Investing in India - a line in the sand.
The conference I attended recently was in UK and had a UK-India partnership focus to it. The topics were pretty good. And there were some really good speakers with some pretty good messages and presentations. They spoke about the facts and the opportunities facing India and the companies and sectors they represent.

But then there were the inevitable "other" speakers. One speaker spoke about his experience in investing in helping build out India's infrastructure. His company, he said, made this one investment at price, say, 100. A few months later another investor came in at price 125. Then, within a few months, the investment was worth 200.
A return of 100% in one year - who could argue with that?
And India needed to build so many more hospitals, power plants, ports, roads, schools....
The need for capital is unlimited; the returns...see my 100%...

Since I am in the business of investments, I was curious.
"Can you comment on corruption", I asked.

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"You draw a line in the sand", he said, "and don't cross it. And we have drawn the line in the sand", and with a flourish left the stage.

That must have been a truth - he must have drawn a line in the sand.
I was not there to see it, but I can accept that.
But he forgot one minor little detail: he forgot to state which side of that line he stood on.
The side that is willing to give.
Or the side that is not willing to give.
A minor detail left to your imagination.
That would make for an interesting topic in a conference: How we say "no" to corruption.

Investing in India - how we can make it better.
And then there were the senior executives of the largest stock exchanges in the world. The Indian market has been ruined by local speculators, they said, and this speculation needed to be stopped.
Indian companies must come and list on our exchanges as we have 16,000 "institutional" investors in London.
And we should be allowed to own exchanges in India so that we can help companies raise capital for their long term investment needs.

The truth is that the Indian market is driven by foreign speculators. Since the year 2003, the ratio of foreign buying to Indian buying is some 4:1.
USD 50 billion of foreign portfolio money has flown in to India and USD of 12 billion of mutual fund and institutional money has entered the markets. This USD 50 billion of foreign money was mostly P-Note money. The kind of money that India does not need but, due to its wonderful packaging at such conferences, finds its way as long term investors under our flawed FII policy.
Even today, these so-called "FIIs" buy and sell some USD 1 billion of shares every day. And they actually take delivery of - or give delivery of - about 3% of that total trading volume.
The local Indians, in contrast, take delivery of 12% of the shares that are traded.
So while Indians may be speculators, the FIIs - supposedly sources of long term money - are even more active speculators.

And the statement of fact: "London has 16,000 institutional investors". Something can be called "institutional" when it has stability. In this case, stability would translate to long term money that stays committed - in good times and bad.
And a sure test for stability: check out the fees charged by the investment manager to those pools of capital that London and New York are "home" to.
How many investment managers charge a flat 1% fee (or less)?
And how many investment managers charge the fabled "2 by 20": a 2% annual management fee and a share of 20% of profits made?

My guess is that the number of people charging this "2 by 20" would account for a lot of those "16,000 institutional investors" in London.
The "2 by 20" investment manager is more likely to be a speculator - the reward structure is geared towards that sort of activity.
There is nothing "institutional" about that - barring the fact that they have "institutionalised" a new business plan.

Some of those investment managers who have that "2 by 20" reward structure probably deserve the money for their smartness and for their superior investment skills.
Many of them are probably there for the kill. For the quick buck.

As for the demand for the stock exchanges to pick up larger stakes in Indian stock exchanges, they are not wishing to come to India to "improve" the market - they are heading to India because they smell easy money.
And what will they bring with them?
The culture of allowing investment banks to bring over-priced IPOs to the market? The stock exchanges of the world are pretty good at that.
But we have that here already.

The cultures of creating new instruments so that people can trade more - and gamble more - all with a view to increasing liquidity and creating a better "price discovery" mechanism.
We have that, here, too. There are many new instruments being created for better "price discovery".
A lax and lenient approach towards their member brokers who have violated the trust of their investor base? Too late, it exists here already.

Investing in India - avoid the truth.
At this conference in UK, I was a listener.
And there was one in USA in June 2006 where I was a speaker.
That was an interesting one.
The Indian markets, if you recall, had fallen -30% between May 2006 and June 2006.
So my discussion topic was: how many of these new investment managers who have been born to exploit the India story really were rolling the dice.
When markets were up, these successful managers showed you returns, when markets declined they bled your capital. They had made their fee income on a "2 by 20" model.
So I was going to ask my panel members: what their returns had been in a "down" market.

Oh, you cannot do that, they protested. We will scare away the investors. And then they will not buy into India anymore. One of the panel members was running a fund that was doing a "rights" issue. A discussion on the recent market decline would not help the fund raise money from investors.

What the other speakers meant was: please don't discuss the truth, we have built a mythical beast with questionable business practices and we cannot now bring sunshine into this cave.

This was the first conference where I was being directed what to say and what not to say. The Chairman for the day was a well known financial advisor with a well known broking firm. A global broking firm that has been accused of so much wrong doing that it is a shame they are still allowed to practice. The Chairman felt that, in light of the sensitive nature of the subject (yes, it was sensitive, investors were being misled!) we should try to limit the fear factor in our discussions.
So we limited the downside discussion and kept the beast of truth locked up in a cage.

The con in a conference is amazing. And that is why we set up our own parallel conferences - the Equitymaster Investor Meets. Our views, our thoughts, your questions - all presented in a straight forward way to give you facts and help you make better investment decisions.

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Quantum Long Term Equity Fund Quantum Gold Fund Quantum Liquid Fund
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Note: Ajit Dayal, the author is a Director in Quantum Information Services Private Limited and Quantum Asset Management Company Private Limited. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited or Quantum Information Services Private Limited.

Mutual Fund Investments are subject to market risks. Please read the offer documents of the respective schemes before making any investments.

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