What does the CEO of a Mutual Fund really do?

We know what the research and investment teams of an Asset Management Company or a Mutual Fund management company do: they work on picking stocks that build up to a portfolio for the mutual fund you are invested in.
For this the research teams have a choice of:

1. watching CNBC and Bloomberg screens all day,
2. looking at squiggly charts and trying to predict the future,
3. reading the printed annual reports which may contain the whole truth (and maybe a lot of half-truths), or
4. calling their best friends in the broking community to get tips on what to buy and when to sell.

--------------------- Do you like the "Quantum way"? ---------------------
If you've been reading the Honest Truth and like what Ajit has to say, we are sure you would be pleased to make our acquaintance.
We are, Quantum Mutual Fund, a fund house that works on a set philosophy - the same philosophy reflected in the Honest Truth - Non-commissions, Transparent Costs, Basic Products, Long Term Investing!
Give us a chance to know you better. We're just a click away!
--------------------------------------------------------------------------------------------

Every mutual fund house has choices on how they wish to manage money. Whatever the path taken, it is the research and investment teams that implement it.

The operations teams and the finance teams are there to ensure that the settlements of the instructions for buying or selling the stocks and securities close smoothly. No hiccups. No failed trades. The operations team have to ensure that bonuses and dividends are accounted for properly and the unit holders get their fair share of what is due to them.

The legal and compliance teams have to ensure that all the employees follow the laws laid down by SEBI and that there is no room for fraud, front-running, or negligence. The head of compliance also has the difficult task of apprising the Board of Trustees - who is there to look after the interests of the investors in the mutual fund. Then there is the Board of the Asset Management Company which needs its reports and comfort that no laws are being broken. And all those filings with SEBI.

Then there is the investor relations team who answer and respond to any complaints that the investors may have. Some need to change their contact details, some may need help in redeeming a part of their investment, and other investors may need help in switching from one product to another within the same fund house.

Yes, there are a lot of busy people in the mutual fund industry.

So, then, if all this work is done by the soldiers and their heads of departments, what exactly does a CEO do?

Meet the boss
So, the Martian comes down to Earth and he says, "I have to spend a day with your leader".
There is a kind of "or else" tone in his voice.

The trembling employee takes him to the boss man.

The boss man has a sign up on the door that says, "CEO - entry loads apply. Exit loads may also be applicable. Trail commissions are a possibility."

Puzzled, the Martian pushes open the door.

And there, behind an ornate desk on comfortable leather chair sits the CEO. His desk is cluttered with phone instruments.

On seeing the Martian, the CEO reaches out to pick up the green coloured telephone. Quick to react the Martian zaps him with a beam which makes the CEO's hand burn momentarily.

"Now, why did you do that?" asks the angry CEO, "I was not calling the security forces, I was merely calling the largest distributor of my fund to see if we could price our units in whatever currency you Martians use."

"Oh, said the Martian, "in all the training videos we have seen, the phone has to be eliminated when someone tries to use it. If we miss the phone instrument, we eliminate the person."

"No, no", said the CEO, "you don't need to worry. These phone instruments are all hot lines to my key distributors. This black one, though, is to my boss. You see 7 of the largest 10 mutual funds in the country - who control 70% of the assets under management in mutual funds - also own insurance companies. So my boss wants to make sure that since we cannot pay commissions to distributors the way we used to, we should use the distribution channels to introduce ULIPs."

"You mean the Uranus Long Inflection Projectile already made its landing on earth before we did?" asked the Martian, horrified that someone else in the solar system got to us before he did, "they promised us there would be no load on their ULIP - it was merely to scan the universe for asteroids."

"No load?" guffaws the CEO in his Master of the Universe voice. "Your friends wouldn't survive here", boasted the CEO, "if you don't pay commission, you die. And if they don't die and still try to build a business that works for the investors, we will plan a second death. I and members of my con-mitee will ensure they go through a living death by using all our intelligence to recommend that the net worth of any company wishing to be in the mutual fund business should be Rs 50 crore at the minimum", said the CEO as he snapped a pencil in two and threw it into the dustbin with finality.

--------------------- Now Equitymaster is on Facebook! ---------------------
We are on Facebook... Finally!
So go ahead, become an Equitymaster fan and start receiving regular updates right away!
Click here and be our fan!
-----------------------------------------------------------------------------

Help your distributors
"So", asked the Martian, "I was asked to come here and find out what you do."

"Well", said the CEO, "I have two roles. My first job is to ensure that my boss can sell as many ULIPs as possible in the next 6 months. You see, my boss also owns an insurance company which is about to do an IPO. And the investment bankers told us: pump and dump! Grow the business, show the public massive volume sales on ULIPs, and then we can help you dump the IPO shares of the insurance company to the gullible public."

"And what is your second role?" asked the Martian, taking notes with his u-pad.

"Well, it is making sure that these phones in front of me are always working. You see, the distributors may want to talk to me at any time and I must be available. I have one sole objective: to grow the Assets under Management, the AuM. The Hindu scriptures tell us that OM is the omnipresent sound, the sound of creation. They were right. It is all about OM, but they spelt it wrong. Our ancestors were monkeys and their speech was not sufficiently evolved to say and spell the omnipresent sound as AUM."

Table 1: In god we believe, in AuM we sing His praise. Why does the CEO focus more on making his distrubutors rich?

	Money that came in to equity funds	Money that went out in the same period	The net amount that stayed	Net amount that stayed as a percentage of all that flowed in
April 2003 to July 2009	Rs 406,616 crore	Rs 287,573 crore	Rs 119,043 crore	29.30%
	This means...	This means...	This means...	Conclusion
Money paid to distributors from the pocket of the investors	Rs 8,132 crore, if we assume a conservative 2% up front end load fees	Rs 1,438 crore if we assume distributors were paid 0.5% as exit load fees	The asset management company earned about 1% each year on the money that stayed; the distributors got maybe another 1% each year - no one really knows because this was never declared.	Are the CEOs of these fund houses working for you - or working for the distributors? That is why I was told by a distributor in 2006, "the elephants dance to our tune, you are an ant - what will you do?"

Source: AMFI website; Note that SEBI banned payment of front end loads from August 1, 2009.
"Why?" asked the Martian, with a puzzled look on his jelly-scarred face, "do you need to have the phone lines open to your distributors?"

"In case my funds have not doing well yesterday, the distributor will call me and report the matter to me. You know, performance sells. So, if we don't perform well every day, the distributor cannot sell any more funds of ours. And if he cannot sell our funds, then I cannot reach my target of market share. And if I cannot get to my target share, I don't get my higher salary and my large bonus. And if I don't get my salary and bonus, I will ensure that those research and investment professionals get a lower salary and definitely no bonus."

"So, let's say the red phone rings, what will you do?"

"Oh, no - not the red one. Red Bull is my biggest distributor and he needs a lot of energy to keep the machine pumping. In the good old days, we used to pay him 5% up front fees and then charter a plane to send his doc boys to Singapore."

"That must have cost you a lot of money", said the Martian.

"You really must be an alien", said the rattled CEO, "we never paid for any of those holidays, cars, or IPL cricket match tickets. All that money was paid for by the investors."

"Oh, so they must really like Red Bull", concluded the Martian.

"Listen, Martian, I don't know what kind of securities industry you have out there, but this is the world of Wall Street and Dalal Street. The investors don't know a thing. They think that we pay for all those trips to Singapore and for the advertisements on TV and giant sized billboards. They even think that the IPL was good for cricket! You sell them a good story and they will believe anything. Didn't they teach you that at your equivalent of the Hit-hard Business School?"

"In Mars", said the Martian proudly, "they pay doctors, teachers, and farmers the most. The pay investment bankers the least and sometimes they feed them to the hungry lawyers who they don't pay too much either. But, pray, tell me what happens hen the red phone rings?"

"Yikes", muttered the CEO, "I hope our regulators never hear about that. Aha, the red phone. Yes, will when that phone rings it means that my equity mutual fund has slipped from being 51 out of 216 funds to being 61 - that means we are no longer in the Top Quartile, the Top 25%. And if we are not in the Top Quartile, then Red Bull cannot sell. And if Red Bull cannot sell, my AuM targets are at stake and my salary and bonus is at stake."

"Then", asked the Martian eagerly, "then what do you do?"

The CEO got up from his chair. "Then I show them who is boss. I march up to the fund manager and his team of analysts and tell them bluntly. Agar shaam tak nahi kiya, to teri gardan ko ...Oh, sorry, what I tell them is to improve their research process and boost their performance. I give them 24 hours to give me a better NAV. I don't care how they do it. But they are free to buy some stocks, call their friends in the print media, web sites, and the television channels - let them spread some rumour and then see the stock they own surge. I will support them by changing the fees and expense ratios for that day so that the NAV of the fund is better. We have a daily target of AuM. One day's slippage has to be made up the next day."

"But what about products that are focused on your customer and the doing the best for your customers and investors?" asked the Martian.

"Listen, in the end, only size matters. Only wealth matters. Don't you read the magazines and watch TV? When is the last time anyone profiled a poor man? This concept of looking after investors is alien. It is not my job. I am the CEO. I focus on how to grow the assets under management. That's all. No discussions. No losing focus."

"Boy", said the Martian, "you really have a tough job. This is quite revealing. I must note this down in my u-pad".

"So, does that mean, Martian, just in case things get hot around here - what with the regulators pushing us to worry about those damn investors - I can try to relocate to Mars? Will I get a 5-year guaranteed salary and bonus there?"

"The only guarantee, I can give you, Mr CEO is that for all the crimes you have committed against investors here every salary and bonus we give you will be invested in your fund for a 20 year period."

"Oh, no - not that, I beg you", pleaded the CEO, "the costs and distribution fees in a flat market over 20 years will bring my investments to zero. Can you at least invest the money in the Quantum Long Term Equity Fund? Their CEO never has to focus on NAV and he has no phones of any colour. Those strange people focus only on what is good for investors".

Hearing that, the Martian zapped the CEO, picked up the red phone and told Red Bull: "Stop lying about how terrible Quantum Long Term Equity Fund is and start telling your investors about them. And take the fees from your investors. Agar shaam tak nahi kiya, to teri gardan ko...."

Note: While the characters and the terminology in this article may be fiction, the situations may not be. If you really want to know how your mutual fund is managed, write to your fund manager and ask him or her how many times in a year is he/she contacted by the sales team, distributor, or CEO with a comment about the fund's performance and a gentle suggestion that "the fund manager must do something or they will not get more assets". Feel free to ask the same of the fund managers in Quantum Mutual Fund - a fund house where no CEO or sales person would have the guts to ever make any suggestions on performance.

POLL: Do you believe that the CEO or sales person influences the way your money is managed because they have targets of Assets Under Management?

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.