Mine Is A Large One - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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29 SEPTEMBER 2008

"Mine is a large one", proclaims the man at the bar.
And brings an envious silence in the room.

So goes the joke.
And so goes reality.

Look around the magazines and newspapers sprawled across your table. They all have articles on companies that are the world's largest and the country's largest.
Large must mean "successful".
Therefore, it must be newsworthy.
Therefore, they are to be covered.

I am, said God, therefore I am.

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

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The groups selected by the Pension Fund Regulatory and Development Authority (PFRDA) to manage the pensions of the government employees are the large pension funds.

LIC Pension Fund Limited.
SBI Pension Fund Limited.
UTI Pension Fund Limited.
They may be good 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.

The Viagra effect.
Our email in-box is being 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.

4But 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 channels persistent efforts 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.

As PFRDA can claim. They were given the task of selecting fund managers for the government pension pools. They chose the large fund managers, from a pool of the largest fund managers. You must be of a particular size before you qualify to even enter their selection criteria. Quantum failed that test.

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

Really?

AIG, the world's largest financial firm is effectively bust - and had to be rescued by none other than the US government. The US government, in its various forms, is the world's largest printer of paper money.

Lehman Brothers, though not the largest investment bank, had the distinction of the world's largest bankruptcy filing. USD 681 billion.

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A company with shareholder's capital of some USD 26 billion supported a business that was worth USD 655 billion. They borrowed 26x their shareholder's capital. And then they made some large investment bets.
So, when a small portion of their large balance sheet investments turned out to be not particularly good ones they went bust. In a large way. It took a 3.8% mis-judgement in their USD 681 billion investment and loan book to wipe out their shareholders' capital.

But that is old news now. That was on September 15, 2008.
Two weeks ago - and two weeks is a long time in a Viagra induced world - Lehman's record bankruptcy is in danger. In an era where largeness grows with every Viagra pill you pop, there is always the danger of meeting another person with a "larger" one.

So we are now treated to the quick bankruptcy and takeover of Washington Mutual, the largest US Saving and Loan association. That was the largest banking failure and bankruptcy n US history. That clocked in on September 27th, 2008.
WaMu, as it was called, had a "wham you!" sound to it as it fell.

WaMu was taken over by the FDIC, another US government agency - still the largest issuer of paper money in the world. According to Reuters, "Washington Mutual has about $307 billion of assets and $188 billion of deposits… The largest previous U.S. banking failure was Continental Illinois National Bank & Trust, which had $40 billion of assets when it collapsed in 1984."

Wow, those Viagra pills were really being popped by the biggest and largest banks to ensure that when they wilted, their size would still be noticed. So Continental Bank was USD 40 billion in size when it failed in 1984 (large for sure), and WaMu was larger at USD 307 billion in 2008. A failure that was 7.5x larger than the failure of Continental in 24 years.

The irrelevance of size.
We launched the Quantum Long Term Equity Fund in March, 2006.
We were small then. We collected Rs 10.7 crore at launch.
We still are small. We have less than Rs 40 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 those that were larger than us.
Much larger.
We compared ourselves to the 5 largest equity funds that existed when we launched Quantum Long Term Equity Fund.
How did we, ahem, perform? 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".

And note that these funds are "large" because you gave them your money.
Your money.
You 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.
Like maybe 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.

A desire to launch sensible 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 months ago?)

Some of you are making the switch: some of you seem to be less obsessed with size.

Table 1: Size does not sizzle.
How assets grew March 2006, Total AuM(Rs crore) August 2008, Total AuM(Rs crore) Change in AuM %
Quantum Long Term Equity Fund 10.9 38.3 +251.4%
The 5 largest equity funds 17,008.2 11,789.5 -30.7%

The BSE-30 Total Return Index increased by +42.7% over the same time period. This means that all funds should have seen their assets grow - just from performance of the base assets in March 2006.
A detailed analysis showed us that only 1 of the "5 Largest" funds looks like they saw more subscriptions and inflows. Since its inception, assets have flowed into the Quantum Long Term Equity Fund and they seem to be leaving the larger funds.

From a performance perspective, the smaller Quantum Long Term Equity Fund has out-performed 4 of the "5 Largest Funds". Only one fund of the "5 Largest" did better than Quantum. 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, irrespective of size, that is focused on an investment and research process - that matches your needs and your ability to take risks.

Note: Distributors and the distribution system. I have been asked why I paint all distributors in a bad light? All distributors are not crooked or only after short terms profits at the cost of their client's interest. I agree. All distributors are not following a questionable business. There are some really good people out there who wish to look after the interests of their clients. And we wish to support you. We wish to applaud you. If any of you, as a distributor, would like to take advantage of our immense research and views on markets and use the tools that we have built over the years, please send us an email to learn how you can benefit from using our platform. Email us! Then the asset allocation tables at the bottom, etc

Suggested allocation in Quantum Mutual Funds
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% 15% 5%

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"

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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Disclaimer: 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 authors, 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 for the web site
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