Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Stop chasing

Posted by Muthu on June 26, 2015

Among IFAs (Independent Financial Advisors), we’ve the largest SIP book size in Tamilnadu, second largest in South India and among top 25 in whole of India. We are being recognised for this in the professional community. This would not have happened but for your trust and support. I’m grateful to each one of you for the same.

You may know Peter Lynch, one of the best mutual fund managers who managed Fidelity Magellan Fund and produced an outstanding performance. He once said that more than 50% of the investors in his fund lost money despite the fund being an outstanding performer. Reason? Inflows were more after few good quarters and outflows were more after few bad quarters.

Boston based Dalbar releases a QAIB (Quantitative Analysis of Investor Behavior) report every year. Dalbar compares how much the investment gave versus how much the investors made. The difference is called performance gap. From 1984 to 2014, for a period of 30 years, the S&P 500 has given an annualised return of 11.11%. Whereas equity fund investors earned only average annual return of 3.69%. The performance gap is 7.42%.

Why performance gap? When a fund, after expenses, over a 10 year period, gives 18% returns, the investors also should have also made the same. But this rarely happens in a real life scenario. Investors invest more when the markets are high and redeem more when the markets are low. Added to that they keep chasing performance. A good fund is ditched because it had a bad year. A risky fund or not so good fund but which shows recent good performance gets lot of inflow. All these ensure that investors as a group earn less than what the funds provide. In many cases, people actually lose despite markets and funds doing well over a period.

You are aware that we rarely make changes to portfolio. Our general advice is always to stay the course through both ups and downs. There are many advisors in the markets, mostly banks, who keep churning the portfolio very frequently. Recently there was a news item that Standard Chartered Bank churned a customer’s portfolio 200 times over a period of 19 months.

Churning is done for both psychological and monetary reasons. Investors constantly want action in their portfolio. Not all investors are matured like you to understand that inactivity is best when it comes to investing. Every time there is a churn, the advisor earns an upfront commission. That’s why unscrupulous advisors cater to the investors’ misplaced need of constant activity to line up their pockets.

There is a change in fund manager recently in IDFC Premier Equity Fund. We see many using that as an opportunity to churn and make money. Over a 20 year investing period, a fund may have change in fund manager couple of times. Also even a good fund may have 3 or 4 bad years out of every 10 years. This is no reason to change a fund. Many experts opine that chasing the recent performance is one of the primary reasons for long term under performance of a portfolio.

When Fidelity got sold to L&T, lot of money went out as many advisors happily used that opportunity for churning. Since we were closely in touch with the fund house and monitored the developments, we advised you to stay the course. Our decision proved to be correct and those funds are one of the good performers today.

Templeton funds are continuing to do well even after Sukumar & Siva has moved away from their fund management roles. ICICI Discovery continues to be a good performer even though Naren no longer manages the same.

Every time there is a change in fund manager or a below average fund performance, investors press the panic button. Advisors (I repeat, in India, it is mostly banks) use that as an opportunity to earn commission by churning the portfolio.

You may all know Prashanth Jain, one of India’s best fund managers. Despite he proving himself for last 20 years, whenever there is an underperformance, he is immediately criticised and investors start complaining. Advisors too berate him for losing his edge. If this is what happens to Prashanth Jain we can understand the plight of equally good but lesser known fund managers.

Investors need to have better maturity. It is unreasonable to expect someone to perform every year (which is extremely difficult in investing) or stay in the same job for decades. If there are no short term pressure from investors, fund managers would be in a position to take better long term calls.

Though our longevity is increasing, we are getting more and more short sighted with the investments. Investors need to control their habit of constantly tinkering with their portfolio and show the door to advisors who encourage this habit for their personal gains.

7 Responses to “Stop chasing”

  1. Raja Babu said

    Dear Muthu, Thank you for your time spent on this amazing blog. You are turning out to be my daily dose of inspiration booster. I would like to request your personal view on SBI Emerging Business fund. Even though managed by pioneer Mr. R Srinivasan this fund is in downtrend for quite some time now. Based on your above posting I guess I should keep faith.

    • Muthu said

      I’m not in a position to reply on queries regarding individual funds. Please have a personal financial advisor / IFA for your investment needs.

  2. Girish Sidana said

    What do you mean by largest SIP book size? How do you define this? Do your clients invest through you or do you promote DIRECT plans of MFs? How can I take your services. I am based in North India.

  3. Dear Muthu,

    I have been reading your articles over the last two months only. It is nice to know that you take time some time to write some articles for the benefit of the readers and investors.

    This article aptly describes that one should have patience as far as investing in MF is concerned. It is in fact true that investments should be based on the AMC rather than the fund manager. The AMC would also be concerned about the investors.

    Again, as you have rightly pointed out, guys like Prashant Jain or Naren cannot be performing consistently on a yearly basis. There would be some setbacks. Overall, they have ensured positive returns.

    I am also of the view that one should remain invested for a period of ten years through an SIP to know the returns that they are generating.

    I would continue to read your articles. Some of them are really very interesting.

    Congrats on achieving the largest book size. Keep going !!!

    All the best.

    Venkat

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