Recently the Securities and Exchange Board of India (SEBI), the ever watchful regulator of the mutual fund industry voiced its concern that it is paradoxical that in the Indian context, one needed qualifications to distribute funds, but there were none needed to manage them. While distributing funds is indeed a responsible task, managing the distributed funds is more so. Therefore, it’s surprising that currently anyone can be a fund manager regardless of his or her qualifications or lack thereof.
This indeed throws up a very interesting issue - How important is the role of the fund manager in the overall scheme of things? Are qualifications and credentials of an individual more critical or the systems, processes and risk management strategies that are put into place by the organization that employs him? In other words, does the fund manager’s investment style take precedence over the fund’s investment processes or is it the other way around?
Unfortunately there is no plain yes or no answer to this question and it depends upon the fund and its philosophy. When you invest in a fund, you are implicitly reposing a certain amount of trust into the fund manager's expertise and capability. You are essentially hiring a professional to manage your money and pick your stocks but because of the cost sharing with thousands of others, the professional expertise comes at an economical price.
Now, conventional logic would dictate that it is the ability and the skill of this professional i.e. the fund manager that should generate the returns in his funds. However is it always so? Investing thousands of crore belonging to lakhs of investors is clearly not a one-man job. And what’s more, now even the international markets are being opened up for domestic mutual funds.
Therefore, typically mutual funds are managed usually by a team of fund managers backed up by analysts and researchers. Without this support, no matter how skilled a fund manager is, he will not be able to deliver optimally. That being said, it is role of the marketing and publicity departments to identify a fund’s success with its fund manager thereby turning him into a star and in the process perhaps over emphasizing his role in the entire process.
Secondly, it also depends upon the type of fund under management. A passive fund, such as an index fund that mirrors a certain benchmark does not require the active intervention of a fund manager. Similarly, a dividend yield fund or an arbitrage scheme where the mandate of the fund is mechanical and pre-defined and not dependent upon individual calls requires more of systems and IT support rather than fund management expertise.
The other factor that one has to consider is the management philosophy of the fund house - whether it is a process driven one or one that provides fund managers latitude and flexibility. Some fund houses give a fair amount of autonomy to the fund manager in terms of taking large sectoral calls, churning the portfolio or even investing in small caps or unlisted companies, of course subject to SEBI regulations. On the other hand there are fund houses that follow a strong, process-driven investment style and the fund manager’s role is to perform within the parameters defined by the fund house. The ones following an individualistic approach could suffer from underperformance of an individual or a high profile exit while those who follow a strict process and back ups, will be more immune.
In fact it is consistency in the fund’s performance that is the litmus test to decide if it is a process driven mutual fund or not. Examined over time, it would be evident how the mutual fund has performed across bull and bear phases. Moreover, chances are that there have been fund manager changes over such a long period. Take SBI MF for example. Its been over a year and a half since the departure of their star fund manager, Sandeep Sabharwal, however, the performance of schemes such as Magnum Contra or Magnum Global hasn’t been adversely affected. However, the same cannot be said about Templeton or Sundaram. In the case of the latter two, fund manager movements seem to have directly affected the performance of their schemes.
However, all said, at the end of the day, successful fund management would in all probability be a combination of both styles. Yes, processes need to be in place, but one has to admit that the very activity of stock selection is a matter of experience, perspective and instinct. These are human qualities that cannot be completely reduced to a process. To put it differently, the buck stops with the fund manager. After all, there is a reason why a ship has one master, a team has one captain and an army has one commander. The person at the helm is the one who provides the vision, guidance and leadership.
Towards this end, SEBI guidelines (whenever they come out) will ensure a uniformity and homogeneity in the credentials of a fund manager. The argument of the process versus an individual may still continue, but if a common certified qualification means an assurance to the investor that his money is in good hands, the effort will be worth all the trouble.
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