• MARCH 1, 2001

Ring out growth…

..and ring in value. This is the new mantra chanted by equity fund managers in the New Year. But is this serious value investing or just another attempt at booking a quick profit?

Most equity fund managers ended last year by showing the door to new economy stocks. And in a surprising move, they embraced the old economy in a hurry. This isn’t exactly surprising when you look at the NASDAQ in the last quarter of 2000, a picture of gloom and a reflection of the dotcom doom. With the NASDAQ’s rather precipitous fall, domestic software stocks also caught the proverbial cold and investors dumped them rather frantically. Fund managers followed suit and exited from software bigtime.

For most investors including fund managers, exit from software was more instinctive than intelligent. It was more reactive than proactive. For instance, if the reasons for buying software were purely fundamental, then how does it matter if the NASDAQ crashes below the earth. Infosys’ superior management and excellent work ethic don’t take a knock just because a few hundred dotcoms crash and NASDAQ is not comfortable with that.

In any case, Investors decided to fill the void created by software by lapping up old economy stocks – cement, petroleum, engineering (banks in any case already existed in equity portfolios).

Disillusioned with software, fund managers also took to old economy stocks. These were the stocks that they had shunned for most last year, in favour of software. Now that software fell out of favour, they were left with old economy for consolation. Firming up of cement stocks redeemed them in the eyes of their investors. With news of an impending disinvestment in public sector petroleum companies, there was more cheer for fund managers and old economy allocations rose further.

Over the last few months we have fund managers waxing eloquent of value investing and its immense benefits. It will be interesting to know if value investing is back by accident or by choice. Fund managers had to get out of the more exciting growth (technology, telecom, media) stocks. Likewise they had to embrace the staid value stocks (cement, petroleum, engineering). So in essence, there was little option for them other than to venerate value investing. So value stocks which were given the boot all along, are on a comeback trail, but only because growth stocks (software, telecom) have lost their gleam.

Fund managers are increasingly getting more and more reactive as opposed to being proactive. When you look at fund portfolios, we find most fund managers ‘chasing’ stocks rather than ‘investing’ in them. There is hardly any direction. Portfolios are churned actively adding to volatility and transaction costs. Yesterday’s star stocks are today’s duds, they are given the boot and are replaced just as quickly. As reported by a business daily, when a fund manager from one of the leading fund houses in the country was asked, ‘Your portfolio in early 2000, contained scrips such as Danlaw Technology, Magic Software and Millennium Infocom. What future do you see for such companies and their share prices?’ his evasive reply was – We currently do not own any of these shares.’ We have seen plenty of such replies in the last year.

Take for instance, pharma stocks and fast moving consumer goods (FMCG) have crept back into fund portfolios, after being cold-shouldered for most of last year, as fund managers see increasing potential in pharma and FMCG stocks. Backed with research and company visits, fund managers are supposed to act with foresight and not hindsight. In other words they should have been in these stocks last year as the potential existed even then, and prices were far lower. If they had been in them last year, there would have more upside. On the other hand, they are getting out of software now because they see Indian IT being pulled down by the US slowdown. This is also something that their analysts should have told them earlier.

Also take for instance the Unit Trust of India (UTI), India’s largest mutual fund (67% market share as on December 31, 2000). In 1999, when investors were selling everything and buying technology, media and telecom (TMT) stocks, UTI was in old economy. Then like the sleeping giant it is, it bought software big time when prices had already peaked. Now like the others around it, it is selling software and buying old economy stocks. This is another instance of a fund chasing stocks, as opposed to investing for the long term. But one cannot say too much to UTI because one never knows if its investing on its own accord or buying/selling on orders of the High Command.

Another common practice that fund managers adopt to hike returns is exiting a stock at a higher price and then re-entering it a few weeks later at a lower price. Here again investment is made purely for price consideration and fundamentals take a backseat. Fund managers are paid fees because it is assumed that they are more informed and function on a more updated knowledge base and not because they trade more smartly than the average investor. If it is a matter of simply tracking stock prices and buying low and selling high, then even a lay investor can graduate to a fund manager!

However, to be fair, fund managers are rarely allowed to make investments without any pressure. Investors are constantly breathing down their necks monitoring their net asset values (NAVs) closely. We asked Sunil Joseph (President, Director – Dundee Mutual Fund) – ‘Shouldn’t a fund be taking a 2-3 year view on a stock?’ To this he replied – ‘You must understand that the Indian investor will never allow us a 2-3 year horizon. The investor and the mutual fund looks at it daily. If you are a portfolio manager you don’t have that luxury anymore of investing for the long term.’

Right now fund managers are singing the value tune and claim to be investing for the long term. Fundamentals are claiming their place under the sun, finally. But it remains to be seen if this is a serious attempt at fund management or just another screen to exploit trading opportunities.

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