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| Edited By: Sandeep Shanbhag |Source: |Updated: Sep 15, 2017, 01:16 AM IST
Money wise
Given their importance in fund management, Sebi's concerns on their qualifications are logical
The Securities and Exchange Board of India (Sebi), the ever-watchful regulator of the mutual fund industry, recently voiced its concern that while one needed qualifications to distribute the funds in the country, none was needed to manage them. Indeed, if distributing funds is a responsible task, managing the distributed funds should be all the more so. Hence, it is only logical that there should be strict qualification criteria for one to become a fund manager; today there are none.
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 are the systems, processes and risk management strategies that are put into place by the mutual fund that employs him? 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 and 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, which should generate the returns in his funds. But, is it always so? Investing thousands of crores belonging to lakhs of investors is clearly not a one-man job. The more so now, given that even international markets are being opened up for domestic mutual funds.
Typically, mutual funds are managed by a team of fund managers backed up by analysts and researchers. And just like a captain is as good as his team, without able support, no matter how skilled a fund manager is, he will not be able to deliver optimally.
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 software, 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 some 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.
So, how does an investor determine whether the performance of his mutual fund investment is the result of an individual's brilliance or organisational processes? Well, the consistency of a fund's performance is the litmus test. Examined over time, it would be evident how it has performed across bull and bear phases and under different managers.
Take SBI MF, for example. It's 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 their cases, fund manager movements seem to have directly affected the performance of their schemes.
At the end of the day, however, successful fund management is likely to be a combination of both. While processes need to be in place, stock selection is also so much a matter of experience, perspective and instinct - these 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.
