Of Labels and Stereotypes

Like it or not, we are all labelled one way or the other – from the Religion we profess to the Country in which we happen to be born among many others. For South Indians, anyone born in the North is a Bihari regardless of whether he is from Bihar or from Rajasthan. In the inverse, anyone south of the Vindyas is regarded as a Madarassi once again overlooking the vastness of the land that is there.

In Investments, we are believers in labels. We can either be Value Investors / Momentum Traders depending on which way the wind is blowing though there are guys (including me) who are die-hard fans of one style versus the other and would rather defend to death our ideology than just be open to whatever works.

Whatever Works. Isn’t that the key?

Chris Gayle you may claim has no style when you compare him to say Rahul Dravid. But in the format of 20-20, the key wasn’t whether he had style or not. It was whether he delivered. Its as simple as that.

In the Universe of Mutual Funds, funds are labelled according to their Portfolio into either Large Cap / Multi-Cap / Mid Cap and the Small Cap Universe. But these labels aren’t permanent for as the portfolio changes shape, so do the labels.

Quantum Long Term fund for example was long labelled as a Multi Cap fund but now is seen and categorized as a Large Cap fund. The fund is currently the best performing fund among Large Caps with a 10 year return of 14.63%. But what if the fund was not labelled and was compared with every other fund with a 10 year track record. Would it still be the leader?

14.63% Compounded Growth over 10 years is no small return and yet it would be placed in the 18th position among all funds (Excluding Sector Funds). Wait a minute you would say, aren’t we ignoring the Risk of these funds verus the lower risk of Quantum?

Thankfully we don’t need to speculate for we have data. For this exercise, I select 2 other funds. The first is IDFC Premier Equity Fund which is the best fund among all Equity Funds over the last 10 years. The second fund is ICICI Prudential Value Discovery Fund, the best fund among “MultiCap” funds of the last 10 years.

Since a picture says a thousand words, here is a chart showcasing the draw-downs suffered by these funds against one another.

Absent labels, could you really identify which fund is a Large Cap Fund, which one is a Mid Cap fund and which one is a Multi Cap one?

When shit hits the fan so as to speak, there isn’t much difference between a good mid cap stock and a great large cap one. Every starts to behave like a small cap and the above chart is just showcasing how close they are when it comes to risks taken.

Now, lets look at the cumulative returns (2006 to date) generated by these funds,

At no point of time has IDFC been even challenged in terms of leadership in returns. Quantum and ICICI were competing with each other before ICICI took off in the “Modi Magic” bull market with Quantum constrained to play catch up.

If I were to have not given you knowledge of the fund names or the labels they carry, which one would you go out and invest today?

Parag Parikh Mutual Fund was launched as a kind of Value Fund. But since fund research houses don’t have a label for Value, its closeted with other Multi Cap fund. The fund is really unique in many ways. For instance its well known exposure to stocks listed in US to the extent that its biggest holding is Alphabet Inc (Google).

Recent portfolio also shows its into Arbitrage (Futures versus Cash) with nearly 8% of the portfolio being totally hedged. It also has around 16% of its AUM in cash.

Since the fund has been launched only in 2013, we really don’t have a track record long enough to compare with other funds. But fact of the matter is that while the span maybe short, its performance hasn’t been great even in that short spell.

With a 3 year CAGR return of 15.66%, its return is half the Category Leader, Motilal Oswal MOSt Focused Multicap 35 Fund. But when it comes to draw-downs, the difference is not too big to suggest that the Multicap 35 fund is taking way higher risk than this fund which could account for the difference in returns.

 

Without the label of being a “Value Fund” , would you be a investor in the fund? To help you make a better call, here is what Warren Buffett said recently about this funds largest holding

Buffett said he had failed to see Alphabet’s growth potential, despite being a user of the online search giant. 

One’s man’s trash is another man’s treasure goes a saying. But if all you have is data from the past, shouldn’t that be the only criteria to judge a fund / investment.

Adios!

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