Should A Fund Manager's Exit Guide Your Investment Decisions?
As you may be aware, Mr Kenneth Andrade, IDFC Mutual Fund's star fund manager recently put in his papers. He has decided to move on.
Performance of equity funds managed by Mr Andrade
(Data as on June 26, 2015)
Given the appealing performance delivered by mutual fund schemes managed by him thus far, the exit of Mr Andrade has left many investors jittery. This is because, they perceive that absence of Mr Andrade may drag the performance of mutual fund schemes so far managed him. Wealth managers too, in such a scenario are hesitant to recommend schemes which are so far managed by Mr Andrade.
Returns for up to a year are expressed on an absolute basis, while those over a year are compounded annualised.
Standard Deviation and Sharpe ratio is calculated over a 3-Yr period. Risk-free rate is assumed to be 7.38%
(Source: ACE MF, PersonalFN Research)
Well, from the table above it is evident that undoubtedly there are reasons to worry about the exit of Mr Andrade, as the schemes managed by him have clocked appealing returns thus far, especially IDFC Premier Equity Fund which has sailed well across market phases of bulls and bears, managed the risk efficiently and has held an quality portfolio mainly skewed towards stocks in the mid cap domain.
So, should the star fund manager's exit, leave you in a heave?
Well, very few investors dispute the importance of a fund manager when it comes to investing in a mutual fund scheme. They hinge the performance of a respective scheme to the fund manager. Many of you as investors may have experienced your mutual fund distributor / agent / relationship manager trying to persuade you to invest in a mutual fund schemes, merely because the respective mutual fund scheme is managed by a star fund manager. The punch line you must have heard is - "Sir, invest in XYZ equity mutual fund. It is managed by "Mr ABC" - a star fund manager, and thus is bound to give solid returns."
But the big question is, whether that's a prudent way to invest and should there be so much emphasis on individualistic fund management.
Well, in our view instead of relying heavily on an individual's fund management trait, it is vital that you give due weightage to the investment processes and systems followed by the fund house. This will help you reduce risk as the investments made (for the portfolio) are process driven, whereby the investment mandates are followed by the fund house, and the fund manager's role is to function within the parameters defined by the fund house.
To assess whether a fund house follows sounds processes and systems, you need to:
Remember, your fund manager has no magic wand. And even if he does, over-dependency would not be the right approach. It should be noted that we are not trying to undermine the fund manager's importance. Even in a fund house which is process and team-driven, the fund managers have an important role to play. However, the key lies in striking a balance between the two i.e. the fund house and the fund manager, and ensuring that the fund manager doesn't take precedence over the fund house.
- Check whether a fund house has a dedicated research team backing its investment decision or stock picking is done based on whims and fancies of the fund manager;
- Delve a little deeper in understanding the fund house's investment philosophy;
- Be wary of fund houses which act as asset gathers in their race to garner more Assets Under Management (AUM) rather than being prudent asset managers; and
- Weigh the investor service and transparency, which is also vital for you as an investor
In case of IDFC Mutual Fund, the fund house follows strong investment processes and systems. So you may not necessarily worry about your investments in the schemes managed by Mr Andrade. The fund house has announced that Ms Punam Sharma would be successor for Mr Andrade, who would continue to be with the fund house and manage respective schemes (for the next 2 ½ months) until he serves the notice period.
Ms Punam Sharma, is an Associate Director - Fund Management at IDFC Mutual Fund and has a vast experience of over 12 years in fund management and research. She's been with IDFC Mutual Fund since September 2001 and is responsible for research on companies across market capitalisations and sectors. At present at IDFC Mutual Fund she manages: IDFC Dynamic Equity Fund, IDFC Equity Opportunities Fund, IDFC Nifty Fund, IDFC Asset Allocation Fund and IDFC Monthly Income Plan. Prior to IDFC Mutual Fund, Ms Sharma was associated with Kotak Mutual Fund where she was responsible for setting up the research desk, involved in product planning and development. Ms Sharma holds a MBA (Finance) and is a Bachelor of Science (B.Sc.).
As a strategy to follow at present, perhaps you may put the funds managed by Mr Andrade on watch list for the next 6 months and monitor the performance closely.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
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