Breaking the myth of size

Posted On Thursday, Feb 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

*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.

Above article is authored by Quantum.

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