admin Across two decades of my advisory career,I have come across a common question – This fund is not performing then why are you not taking an action? As advisors I meet a lot of fund managers in person, understand their investment strategy and then decide what to recommend to whom, and which fund will perform in a particular market scenario. There are various investment strategies and investment styles of fund managers and not all funds will deliver the same return in a particular time interval. Some may deliver good returns in the first six months of investment and some may deliver after 18months. What differentiates one fund manager from another is explained below.
Growth strategy – In this strategy the fund manager looks for companies that can have another 10 years of consistent growth in Sales and Earnings, these stocks are always quoted at a higher valuation they are not always the top 50 stocks, but the fund manager generally picks up stocks from the list of top 150 stocks. We generally suggest investing in these funds when we are in a recessionary trend or we have experienced a phenomenal bull run. It is not that these stocks will not fall in a falling market it just that they recover faster due to their robust business model.
Momentum strategy – In this strategy the fund manager invests in stocks based on recent price rise or speculation of price rise. The fund manager takes short term calls and generally trades stocks, the average holding period of the stocks can be anywhere between 3months to 6 months. These funds can be identified based upon their turnover ratio. Generally, these funds are seen as the best performer in of bull run and the worst performer in bear run.During a particular phase of bull run they show a very high return and that’s where investors get trapped. SIP’s are the best option for momentum kind of funds and investor need to keep patience and do profit booking when there is exceptionally high XIRR returns.
Value strategy–In this strategy the fund manager looks for stocks that are quoting below their intrinsic value. A stock may quote at a low value due to various reasons like low demand, change of management, earnings downgrade, and many more. The loss in the value of business may be in single digit but the stock price fall may be in the range of 30-40%. The fund manager looks for these kinds of opportunities, and they are also called contra funds. A true to label value/ contra fund hasan exceptionally low correlation to the indexes. These funds do not move in tandem with the benchmark – so investors investing in these funds seldom have this concern that Nifty has gone up but this fund is not performing. The value unlocking will take its own time, and this makes the movement of the fund very erratic. Generally, these funds perform at the fag end of a bull run when quality stocks are already overvalued, then the money flows to value stocks.
Overlap the benchmark– Since a fund manager’s performance is constantly compared with the benchmark they prefer to have 20-30% common stocks of the benchmark, a higher overlap is seen in funds with very high AUM (assets under management). There are some funds that have a very low overlap with the benchmark those fund managers like to experiment or take a risk and generate alpha. Lower overlap denotes innovation and at the same time preparedness to take the risk of non-performance over a time interval. These fund managers are generally working from very small AMC (Asset management companies) where the team size is smaller and investment process is not very stringent. We generally suggest higher overlap funds for new investors and a lower overlap fund for experienced investors.
Concentrated portfolios vs long tail portfolio – Some fund managers build a concentrated portfolio with top 10 stocks amounting to 50% of the portfolio, they believe in investing in high conviction ideas. On the other side, there are fund managers who have a long tail portfolio they will have 25-30% of their bottom portfolio spread across 40-50 stocks and the stocks in their portfolio range between 60-80 companies. These fund managers follow a strategy to track an exceptionally large base and add to only those stocks that start showing performance. A concentrated portfolio strategy can be beneficial in a flat market very only a few stocks or segments are moving, and long tail portfolio is beneficial in a broad-based rally. The overall return of a perfectly managed long tail portfolio exceeds investors’ expectations.
About the Author
Manju Mastakar
The author is Managing Director of Armstrong Capital & Financial Services Pvt. Ltd. and she has over two decades of experience in Investment planning.
Armstrong Capital offers comprehensive Investment Solutions for Individuals for more details visit: www.armstrong-cap.com
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