The Solace of Quantum - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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13 NOVEMBER 2008

I really like James Bond movies.
And I enjoy munching popcorn as I watch Mr. Bond, neither shaken nor stirred, as he goes about his business of saving the world.
From all the bad guys.
From all the terrible people out there who would destroy cities, annihilate countries, and threaten the world as we know it.

All for money and power.

So it was with excitement that we went and saw the new James Bond film: Quantum of Solace.

And munched on the popcorn as Mr. Bond saves the world once again.

From the evil enterprise of, alas, Quantum.

The goodness of this Quantum
The Q and the Quantum name are pretty much the only characteristics we believe we share with the villains in the Bond film.

In a world that is drowning from the excessive greed of the financial geniuses, we hope we were - and remain - the sane voice, dear reader.

We hope that each of you believe that every recommendation we made - whether right or wrong - was made with certain assumptions on the way the economic world would evolve.
We may have made some erroneous judgements, but there was no malice - no hidden intentions - in what we said or wrote.

The analysts at www.equitymaster.com do not recommended buying a share because a "promoter group" guaranteed school admissions in Manhattan, New York for their children.

Nor did we get any cash, discounts, or gifts for writing a lie or a half-truth.

And, yes, the financial consultants in www.personalfn.com did not get any free trips to Mauritius or Singapore for recommending some pretty lousy mutual funds to be stuffed into your mutual fund portfolio.

And my colleagues at www.QuantumAMC.com have painstakingly built a track record on the limited funds we have launched. They continue to believe in what we are doing: building a platform for low-cost and sensible products that will earn sensible returns over the long term. Without taking any wild and unnecessary risks. And without compromising our ethics by trying to use the entrenched distribution channel in a fair way.

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Behind the secret curtain
We take a peek outside of the cocoon-like world that we live in.
And we shudder.
We are amazed at the complete reversal of roles: many finance companies have been built to cheat you or mis-lead you.
Eventually, they take what is not rightfully theirs.
From your pockets.

And they say it openly: they are after your "share of wallet".
Nothing wrong with that - until their strategy is clear: by hook or by crook.

At least the pickpockets at railway stations and airports have to contend with the police.
And there are signs that say: "Beware of thieves and pick-pockets".

And the tobacco manufacturers have to put labels on their poison and pay for the advertisements that say: "Warning: smoking is injurious to your health."

When is the last time you saw a hoarding that said: "Be careful, dear investor, I may be selling you a product that will probably never make money for you but will always make money for me."?

Instead, the financial services industry is made to advertise some risk factors clause that no one even reads.

Or when it is read out on the TV ads, it is read so fast that the person saying it could be a Tamilian speaking Marathi - or a Maharashtrian speaking Kannada.
All great examples of national integration but not good examples of transparency and ethics in the financial world.

The risk factors are rapid-fire, unintelligent, gibberish transmitted at ultra high speed that no one even knows what the person is saying.

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Listen to the voices
So we browse the internet and the newspapers to see where the world is today.
How many more financial geniuses are trying to eke out some of the trillions of dollars being pumped in to resolve the global mess that they have created with their greed, lies and cheating? When will greed surrender and admit guilt?

1) You are helping those who stole from you says the HSBC chief in the Financial Times.

The state-sponsored bail-outs of western banks risk rewarding management teams for failure, the chief executive of HSBC warned, according to an article in the Financial Times.

Michael Geoghegan’s comments on Monday reflect a deep frustration the recent bail-outs has caused among executives at HSBC, which, despite suffering heavy losses in the US mortgage market, has weathered the credit crisis in better shape than many of its rivals.

He said: "There is no question that guarantees have been given to failed managements."

"I hope these guarantees don’t last too long because they may create the wrong type of behaviour by managements in those banks."

He added that they risked distorting the market.

However, HSBC executives acknowledged the rescues in the US and Europe were necessary to stabilise the banking system and restore the flow of credit to the economy.

2) It may still take a while before Wall Street finally accepts that it won't get paid, writes Michael Lewis on Bloomberg.com.

At the moment, as their bony fingers fondle the new taxpayer loot, the firms appear to believe that they might still fool the public into thinking that bonus money isn't taxpayer money.

"We've responded appropriately to the attorney general's request for information about 2008 bonus pools,'' a Citigroup Inc. spokeswoman told Bloomberg News recently, "and confirmed that we will not use TARP (the US government’s bail out) funds for compensation.'' But as the Bloomberg report noted, "she declined to elaborate.''

As well she might! For if the Citigroup spokeswoman had elaborated she would have needed to say something like this: "We're still trying to figure out how the $25 billion we've already taken of taxpayers' money has nothing to do with the $26 billion we're planning to hand out to our highly paid employees in 2008 (up 4 percent from 2007!). But it's a tricky problem because, when you think about it, it's all the same money.''

Sadly, the public is now poised to see through any ruse: This pile of money instead of that pile, stock instead of cash, options instead of stock, options on options instead of options - - none of it is going to fool anyone anymore. If Goldman Sachs Group Inc. paid its bonuses in old office furniture, there would be a story in every major newspaper the next day that examined the market for second-hand desk chairs, and calculated the cash value of the haul.

3) The Fed bails out AIG, but they keep on going...from CNNfn.com

In recent months, AIG has come under fire for picking up a $440,000 tab for a weeklong retreat at the posh St. Regis Resort in California for top-performing insurance agents, just days after the U.S. government stepped in to save the company with an $85 billion taxpayer-funded loan. AIG also spent $86,000 for a hunting trip in England as the faltering company reaped another $37.8 billion in taxpayer funded loans.

Lawmakers investigating AIG's meltdown said they were enraged that executives of AIG's main U.S. life insurance subsidiary spent $440,000 on the retreat, complete with spa treatments, banquets and golf outings.

Company officials said the activities had been planned months before the bailout. On Oct. 10, the company pledged to do everything possible to end such extravagances and has since agreed to freeze millions of dollars in compensation and bonuses for former executives.

The most recent event held in Phoenix, came as the government announced new financial assistance to AIG (AIG, Fortune 500), including pouring $40 billion into the company in return for partial ownership.

Liddy said the company conducted a "top-to-bottom review of all expenses of the Phoenix meeting in advance and found that it was consistent with my Oct. 10 directive."

4) Bonuses for Wall Street Should Go to Zero, U.S. Taxpayers Say according to Bloomberg.com

U.S. taxpayers, who feel they own a stake in Wall Street after funding a $700 billion bailout for the industry, don't want executives' bonuses reduced. They want them eliminated.

"I may not understand everything, but I do understand common sense, and when you lend money to someone, you don't want to see them at a new-car dealer the next day,'' said Ken Karlson, a 61-year-old Vietnam veteran and freelance marketer in Wheaton, Illinois. "The bailout money shouldn't have been given to them in the first place.''

Compensation at Goldman Sachs Group Inc., Morgan Stanley, Citigroup Inc. and the six other banks that received the first $125 billion of the federal funds is under scrutiny by lawmakers, including Rep. Henry Waxman, a California Democrat, and New York Attorney General Andrew Cuomo, also a Democrat. President-elect Barack Obama cited the program at his first news conference on Nov. 7, saying it will be reviewed to make sure it's "not unduly rewarding the management of financial firms receiving government assistance.''

And it goes on and on and on.
The geniuses trying to take the next chunk of change from the system and the nincompoops like us who sweat it out trying to stop the last great robbery.

The Indian version

And this is not an "only in USA" event.
There are shades of it in India.

The FMPs are a classic example of how the pushers of dangerous products stretched the envelope for their immediate market share and their instantaneous rewards.

They Fixed Maturity Plans raised thousands of crore of money for some of the India mutual fund houses.
And they went on investing this.
And raising more money.
Eventually they invested some of the money in “illiquid paper”, ignoring the risk of resorting to “fire sales” due to premature redemptions.
Some issued by real estate companies promising higher returns.
Anyone promising higher returns should be suspect.

But that did not stop the Indian mutual fund houses.
Just as it did not stop the greedy folks on Wall Street.

They raised even more money and may have received great bonuses for that: why shut down a good thing?
By September 2008, there was an estimated Rs 400,000 crore of investments made in all the debt funds in India.

Hip, hip, hurray! A new level of Assets under Management had been achieved!

Well, the mutual fund industry had to go the Reserve Bank of India to get bailed out.

The investors wanted their money back.
The mutual funds had invested not able to offload the debt instruments.
Many of them were in illiquid investments.
And if they were able to liquidate these illiquid investments, it was at a loss.
Liquid funds are not meant to give you a negative return.
Some did: because they had to sell the underlying investments at a loss to pay back their investors.

The RBI bails them out - like the CEO of HSBC said of the US situation - because they had to.
Eventually all these bail-outs anywhere in the world are with tax-payer money - but the guilty went unpunished.
To be fair, we are in unusual times. The credit markets in India did freeze after the blow up of Lehman Brothers. No one expected these crises.
But are the past profits of this excessive growth in FMPs finding its way back to the RBI or the tax payers?

Is risk-taking this magical coin that is tossed up and when it drops it is: "Heads I win and tails you lose."

Even James Bond would marvel at this savvy gadget that has been invented in the financial world.

But while the world spins with all the financial engineering and the web of fiction, we hope that you will find Solace in Quantum.
And in the many more companies that exist like Quantum.
We wish to earn a profit from the world of financial services - but by being honest and transparent in our views and recommendations.

Meanwhile, munch the popcorn and watch the world unfold: badly shaken and seriously stirred.
And know that the business principles we have adopted at Quantum remain steadfast and anchored in integrity.

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 (New)** 46% 12% 42%
Suggested allocation (old) 80% 15% 5%
** Assumes 2 years of expenses are kept in safe places like liquid funds.

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: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt Ltd and Quantum Asset Management Company Pvt Ltd.. 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.

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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