Value of independence – a response to our critics

A recent ET Wealth study done jointly with us, had many of our distributor and advisor friends lash out at us on social media. The same happened some months ago when we took a firm call on Franklin funds. We thought we should not react but since this appears to be repeating, we decided to ‘respond’. 

We have several ‘buy’ calls on funds. No distributor/advisor criticizes us for wrong judgement there. Whenever we give ‘sell’ calls, we are hit out in the social media (without naming us of course – they are gentlemen) as being ‘immature’ ‘rash’ and that we ‘need schooling’, ‘we do this for a hobby’  or ‘performance alone does not matter’ etc. These comments are never from investors (they give us more constructive feedback, thankfully). They come from doyens in the advisory industry whom we respect and from whom we learn, along with several respectable distributors. And many are but good friends in Chennai! It’s a small city here folks.

To these doyens and distributor friends, we wish to say –  we are open to learning. We welcome criticism. But we prefer them to be issue-based and factual. A general dig about our ‘testing labs’ doesn’t help us improve, you know! 

So, here’s the thing: 

When we gave a ‘sell’ call on Franklin fund house, it was only partly based on the performance – our detailed note had it (not our problem that the media took excerpts).  It was a judgement call on how a fund house that put investors through painful times can be depended upon again. It is our view and we stated it clearly. Why does it upset distributors? Please feel free to counter it with a rebuttal based on facts and logic. 

When we wrote on HDFC Top 100 or ABSL Frontline Equity a year ago on why we prefer index funds to these large caps it was based on sound evidence of exceedingly inconsistent performance. It remains the same. 

For those who question us on our testing labs, we wish to make two points: One, our process and our thought process: We like to follow a process rather than just tell our customers ‘X fund manager is a good guy. We trust him. He has conviction in his calls’. That is not our way. 

We respect all fund managers and their difficult task. But to us, performance matters and consistency in performance matters the most, however small or big an AMC or fund manager. Our numbers time and again show that consistency pays off in the long run. Our ‘testing labs’ have enough ‘metrics’ to show us ‘steady relative underperformance or outperformance’. 

Yes, we do go beyond numbers to the ‘prudent portfolio construction’ that someone asked us to measure. Every fund’s portfolio has a story to tell and means to be prudent. One can decide not to tolerate the portfolio underperformance, or one can give a narrative of conviction and decide to wait. Where it is not clear, we do hear what the fund manager has to say. We recently did that for a midcap fund too! 

But in this qualitative second step, it boils down to what convinces us or the investor. And that becomes a subjective call.  That is where we take comfort in process. We take comfort in a fund manager sticking to his/her process but willing to make changes when the performance chain breaks. We think that is an important quality in fund management. Course correction shows willingness to change and improve. 

Instead, to ask an investor to wait it out because a fund cannot perform or will perform in spurts and go silent later is not quite convincing, is it? And for 3 years, 5 years? Does an investor need a fund manager and an advisor on top of it, to say this? He might as well throw a dart! 

Two, investor behaviour: There is little reason for an investor to tolerate prolonged underperformance simply because the odd year will give him the bounce back. Which year will that be? In Tamil, there is an adage: ‘thai pirandhaal vazhi pirakkum (come the harvesting Tamil month of thai in January, there will be a new path). A poor fellow asked ‘endha thai?’ (which January will it be?) The odds don’t favour an investor in the face of prolonged volatility and stark underperformance. 

 Our own study of several thousand customers in an earlier firm, tells us that investors who are long-term will not put up with poor performance beyond a year or two. 

Secondly, there is a HUGE difference between a young investor with a portfolio of a few lakhs and another with several crores. The latter is affected very little by underperformance in a couple of funds while the former does take an impact when his few thousands of SIP underperform. 

Besides, he/she now has a poor experience. He will not return. 

And pray, when they have better alternatives in MFs, what favour are we doing by asking him to stick to an underperformer? Is it tax? It is the investor who should be concerned, not the advisor/distributor. Please don’t take an investor to be a fool! Is it commission? In that case an investor should be even more concerned!

 For 20 years or so ‘the buy and hold’ mantra has stood investors (and distributors) in good stead (and still does). But that is meant to ride out the market volatility and the market underperformance – NOT FUND UNDERPERFORMANCE when a whole bunch of other funds manage their act! 

If investors did that 15 years ago, it was because they could not keep track of performance. It was too cumbersome to even switch funds! Any reason they should act the same now, when they can see their fund’s performance with a click and there are better and clearer alternatives? Even if that means simply an index fund? 

Besides, the 20-year argument is not going to help an investor who has, say, 7-12 years to accumulate enough returns for their children’s education, does it? Is 10 years too short a period to expect a fund to deliver?

And who are we – as advisors, researchers, or distributors to ask investors to put up with underperformance for no reason? Who are we to insist that an investor MUST hold THE SAME FUND for 20 years to see results? Who are we to bask in the past glory of an AMC’s 25 years track record when a 25-year-old doesn’t give two hoots about it? 

And how long are we going to say not holding ADAG stocks helped a fund in hindsight or not going near infra and real estate helped an AMC in 2008? Of course, it did help! Good for the investors. MOVE ON and show us what funds do NOW!!! 

It’s about time the investor’s ‘guides’ took a relook at changing investor preference, changing product line-up and changing ways to invest, track and review. Why are index funds a taboo in many distributors’ books, even today? 

And finally, our calls on funds are our views. We will stay accountable to investors who take them. Why does it bother so many of our distributor friends? After all, they have their own processes and outcome to share with their clients? 

Also, please be assured – we have our own ‘research game’ and we don’t need any ‘schooling’. We have our own track record of writing and educating investors through various forums including media. And we definitely have a track record of creating wealth for thousands of grateful investors across the country through our research and recommendations.

Gentlemen, you’re all welcome for a coffee session in our office if you want to know if we have ‘metrics’.  We will be happy to show you. The learning can be mutual! Avoid ‘virtual’ mudslinging and troll-like behaviour. Doesn’t do anybody any good. 

Let’s move on. It’s not 2001, its 2021! The investor is king not the manufacturer!!