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Commentary

Being Different Isn’t A Bad Thing

In the world of me too’s, the only way to stand out is to be different and it’s no different in the world of investment management where your only standing is why you are different from others and hence are attractive as a place to park your capital.

Motilal Oswal whose motto is, Buy Right – Sit Tight for example claims to invest its money following QGLP parameters – Quality – Growth – Longevity and Price.

Parag Parikh Mutual Fund on the other hand claims to be a firm believer in the concept of Value Investing and buy companies that are low on debt, high on cash and are good managements who can be banked upon.

Porinju Veliyath, a small PMS fund manager running a PMS fund from Kerala (Quick, Name the Capital of Kerala) too wanted and for a time has been different. While others swear by quality managements, Porinju believed in investing in companies that had good business but bad promoters / managements.

The concept in itself isn’t new for in developed countries, Hedge funds try to build stakes in companies handicapped by an indifferent management but one which otherwise has a great business. Once they acquire a significant stake, the next move is to try and get into management to enable them to change the behavior of the company.

From Bill Ackman to Carl Icahn to Daniel Loeb, activist fund managers for a time have been a huge hit in the United States as they went about breaking down the old companies in search for the elusive alpha.

Porinju model in my opinion was quite similar with the only difference being that in India, promoters own much larger stakes and it’s tough to take on an activist role. Yet, he was able to generate returns way above what could be gained by an do it yourself investor in the markets.

Here is the snapshot of his returns from the Disclosure Document

While Nifty is not the ideal benchmark given his penchant for investing in small cap and micro-cap stocks, the fact remains that, his fund returns are higher versus the correct benchmark – Nifty Small Cap 100 Index.

Unfortunately, great returns also meant that more investors got attracted to the fund. More the investors, tougher it’s to deploy and generate returns of the past.

One of the most quoted busts in history has been Long Term Capital Management. While there were many a wrong with the fund, what actually cooked the goose was the fact that they had reduced capital while continuing to hold positions which meant leverage ratio went up even further & one small spark and the whole empire came tumbling down.

The reason much of the active fund industry in America can hardly beat the Indices is that with huge money at their disposal, it’s tough to be different.

To be different means to take risks out of the ordinary – when it clicks, one is hailed as the next god of finance but when it fails, everyone is happy to take pot shots at how stupid (in hindsight) the strategy was.

Assume for a moment Soros went bankrupt in his campaign against the British Pound. Rather than being called the man who broke the Bank of England, he would have been consigned to history as a fool who tried to take on the Central Bank.

Micro Cap Investing comes with its risks and if the investor isn’t prepared for that kind of risks, he is invested in the wrong place.

DSP BlackRock Small Cap Fund (Erstwhile DSPBR Micro Cap) was the top performing fund a few months ago – but go back 10 years earlier and you will see that the fund was very nearly wiped out in the bust of 2008. While most investors would have dumped their holdings seeing such a loss, notional it maybe, they were again begging to be let in when the fund delivered humongously in this bull run to the extent that the fund house had to close new subscriptions.

Value funds under-perform in strong bull markets, Momentum funds under-perform in bear and sideways markets, Quality stocks of today can turn out to be Fraud stocks of tomorrow. But since they are all different from a plain vanilla market capitalization based Index fund, the probability is that they will turn out different results – hopefully for the better but could be worse too.

The reason for money getting attracted to Hedge Funds / Portfolio Management Schemes are for the reason that the fund manager has much more independence versus mutual fund managers who are mandated on what they can buy, how much they can buy, how much cash they can keep among others.

Difference is also the reason for funds to charge a higher fee than plain vanilla Index Funds or ETF’s which come at a fraction of those. If a fund behaves like a closeted Index fund, why pay 10x the fees?

Fund Management is no fun. It’s tough to manage one’s own emotions, let alone manage the emotions of hundreds of investors who have their own views. While wrongs need to be pointed out, mocking when one is down helps no one.

Disclaimer: I work as a Compliance Manager at a Portfolio Management Company. Views expressed here are my own. Consider me as biased in favour of Active Management.

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