Posted by
Quantum on
Thursday, February 04, 2010
Money can buy you a lot of ads in the press.
And the firepower of money can convert a mediocre
product into a bestseller.
And if you say the same lie over and over again, the
loudness of your voice can convert that lie into a
truth.
Till, of course, the facts bring out that the "truth" was
nothing but a lie - though it was made to sound like a
truth!
And so, here we are at Quantum Mutual Funds,
trying to figure out the truths of the investment
world. And staying away from the lies, the
falsehoods, and the myths.
It has been 3 years since we launched the Quantum
Long Term Equity Fund and the Quantum Liquid
Fund. We have spoken our truths - and we are
learning some new ones. We have also heard a lot of
myths and lies. Happily, we have shattered a few
myths along the way.
But nothing was as hilarious as the myth of size.
The myth that size can compensate you for all the
other deficiencies in DNA that may plague you.
The larger the fund house, the better its
performance.
The logic of this myth? Well, if the fund house is big, it
means it has more money. And if it has more of your
money under management, it means the fund house
is earning more revenues. And if it is earning more
revenues, it can pay its staff more. And if it is willing
to pay its staff more, it means that it can hire the best
and brightest talent in the industry. Therefore, dear
reader and hypnotised TV watcher, the largest fund
houses - with all that money rolling in from the fees
they earn from you - will have the best performance!
We read these views in articles carried in some of the
most respected newspapers and magazines. We
heard these views on the popular TV channels.
And we did not know whether to laugh or to cry.
The logic was beautiful to the extent of being stupid.
What was the big fund house really saying? Were
they confessing that they were incompetent to
manage your money to start with but, if you gave
them your hard earned money on hope, then they
would earn fees on it and then go out and be able to
hire a fund manager? So their skill set was not
managing your money, but collecting it from you -
and then hiring someone to manage it. And where is
the proof that big fund houses can actually hire the
best and the brightest and that the funds they manage will do well?
We laughed at the stupidity of the notion that money
can buy you the best and the brightest. Believe it or
not, there are some people in the investment
management industry who would prefer earning a
lower salary - knowing that they work in an
environment that fosters ethical and independent
thinking.
Sure, these poor underpaid fund managers may not
be awarded any "Fund Manager of the Year" award
but, for what it is worth in the world we live in, they
would live honest lives. And focus on managing your
money.
But how does this myth of size stack up with the fact
of the numbers? In March 2006 - when we launched
the Quantum Long Term Equity Fund - the 5 largest equity fund schemes in the country had a total
corpus of Rs. 17,008 crore. These were indeed the
Large Ones, the Big Daddy-o's of the industry. They
were big because you put your money in there.
Size may matter - but not in funds.
So how did these 5 Large Funds perform? Well, from
th the 13 of March 2006 (the first NAV of Quantum
Long Term Equity Fund was announced on that date)
th till the 13 of April 2009, the average performance of
these 5 Large Funds was a loss of - 2.42%. This means
that Rs. 100 invested in March 13, 2006 in a basket of
these 5 funds would today be worth Rs. 97.58.
Meanwhile, the Quantum Long Term Equity Fund
gained +0.29% which means that an investment of
Rs. 100 would today be worth Rs. 100.29
Table 1: Quantum Fund was the smallest equity fund...but did well.
*AUM Size is as on March 31, 2006. Source AMFI
Returns are for the growth plan calculated for various periods ended on April 13, 2009.
Source Bloomberg
Past performance may or may not be sustained in the future. The Quantum Long Term Equity Fund, by the way, had a corpus of only Rs 10.9 crore in March 2006. Our size was 0.06% of the size of the Large Ones. And, yet, we performed better.
So, the next time you hear someone say: it is a large group, they have size.
Recognise this: how much money they make or lose for you is not a function of their size. But, rather, it is a function of how well they can select a portfolio of stocks for the long term, without taking any wild risks.
Note: Always invest in a basket of mutual funds that match your risk-return expectations.