Should we fire the Fund Manager?

Or should the Board of Quantum Asset Management Company Private Limited fire me?

Or, worse, should investors in the Quantum Long Term Equity Fund bail out and put their money in some other equity mutual fund?

Hang on: let me tell you why I am raising these really important questions.

During the many hours of discussions and presentations of the Path to Profit across many parts of South India, I warned the audience:

"We were the first to say that the BSE 30 Index can touch 21,000 by June or July 2010. We said that when the Index was bouncing around in the 8,000 to 10,000 range. Our performance numbers have been good for a 1-year, 2-year, and 3-year periods. But, I warn you: though we were the first to make the case for a bull market, we will now underperform."

The audience gave me that strange look reserved for really strange people.

"Strange, isn't it? I stand here in front of you, predicting a bull market and then saying that the Quantum Long Term Equity Fund will not do well."

"Why? Because as value managers, the stocks we own will begin to look 'expensive'. And so we will sell those 'expensive' stocks. But we are humble enough to recognise that our selling will have no impact on the market - the stock markets will continue to rise. Remember, in bull markets fear is out and greed is back. Irrational prices will prevail again. As we sell out of stocks, our cash levels will increase. Cash earns us 4% to 5% in a year. That is useless when compared to a roaring bull market when stocks can surge 4% in a day! So, ladies and gentlemen, we will underperform. We are predicting our own death!"

Therefore, what should we do?

This is the background.
This is why I pose the question: should we fire the Fund Manager and all the research analysts?
Or should the Board fire me?

The email hit my inbox today from our internal sales team.
There are 248 diversified equity funds out there.
And the Quantum Long Term Equity Fund was ranked 248.

That's right: dead last.

I rubbed my eyes.
I sent back an email: "Are you sure?" I asked.
"Yes" was the reply, "we are last."

I had not written an Honest Truth for a long time.
Here was a great opportunity: an opportunity to tell you that we are ranked last!

Such an event may not last long. So, I better write about it and let you know about it before this historic moment slips away unnoticed by any ranking tables, unnoticed by anyone.

But getting back to our prediction and discussions during the Path to Profit: we were right.
But, wow! - That was quick.
My prediction of 'underperformance' was accurate.

And the BSE 30 Index is nowhere near the 21,000 level - we still have another +21% to get there.
Our cash levels have increased. The fact sheets for the Quantum Long Term Equity Fund indicate that the Fund owned 27 stocks as of September 30, 2009 (29 stocks in August) and the cash level in the Fund was 9% (2% in August).

So, clearly the Fund is selling out of some stocks and not putting the money back in the markets.

But how do we get a -2.12% rate of return for the week ended October 21, 2009?

Owning cash hurts the upside for sure, but owning the 'wrong' stocks is what can hurt most!

For the week ended October 21st, the stocks we owned did not "rise" in price.
The stocks we did not own, did a lot better.

So, we suffered.
For that one week.

A lesson for all of us

The way stocks are researched for the portfolio of the Quantum Long Term Equity Fund has not changed.
The way stocks are picked for the portfolio of the Quantum Long Term Equity Fund has not changed.

But the way the markets price the stocks we own changes every minute!
The last time we checked, the managements of the companies we own still run the way they ran their businesses last week - or last month.

But, on some days, the stock markets love the share prices of certain companies.
And on some days it loves some other stocks!

A similar portfolio gave the Quantum Long Term Equity Fund a pretty good track record for the 1-year, 2-year, and 3-year time periods ended October 21, 2009.

So, markets bounce.
Share prices jump all over the place.
But the investment thesis for us to own stocks in the Quantum Long Term Equity Fund has not changed.

The ranking numbers are - like the clouds - passing in nature.

I am sure we were ranked number one sometime...I missed writing about that!
I happened to catch our wonderful 248/248 ranking. And I write about it.

Rankings do not change what we do.

Here is what happened to those same stocks for the one day, October 22nd compared to where they ended on October 21st.

So, the stocks that hurt us because we did not own them for the week ended October 21st had a terrible October 22nd.

We have no clue why.

I have not seen the ranking tables for the one day October 22nd - if they exist - but I can wager we had a better rank than 248 out of 248!

As for firing our fund managers or the research analysts: they are really good people and very disciplined in what they do.

Rankings don't rattle them.
Assessing and pricing risk is what they do very well.
And generating returns over longer periods of time.

They avoided stocks like Reliance, ICICI, L&T, DLF, and Unitech because the risk-return reward was not attractive - or the managements are totally avoidable.

We let others boast about their rankings and their stars and "returns".
We focus on risk we wish to take and the return we wish to be rewarded for the risk we have agreed to take.

Like my late uncle sang in his song: Aadmi ache hai, par waqt bura hota hai...

The Fund manager and their research team that looks after your savings in the Quantum Long Term Equity Fund is good - as is the process - the times are strange.

Or at least the week ended October 21st was strange.

So, my appeal to the Board of Quantum AMC is: please don't fire me.

And my appeal to you is: If you wish to double your money in a day - or are scared to invest in a Fund that is willing to take it on the chin once in a while for correctly assessing long term risks of buying certain stocks - then, please stay away from the Quantum Long Term Equity Fund.

But if you wish to make sensible long term returns - and don't get rattled by this 248/248 ranking for one week (just as we are not) - click here and start the process for investing in the Quantum Long Term Equity Fund.

Disclaimer : Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"

Ajit Dayal, the author is a Director in Quantum Information Services Private Limited and Quantum Asset Management Company Private Limited. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited or Quantum Information Services Private Limited.

Mutual Fund Investments are subject to market risks. Please read the offer documents of the respective schemes before making any investments

Note: This article was first carried on www.equitymaster.com

Above article is authored by Quantum.

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