When HNIs Sour On Mutual Funds, They Step Into An Opaque World

There are unintended consequences of dumping mutual funds for richer investors as well, writes Abaneeta Chakraborty.

A metal ladder in a small room. (Photographer: Cooper Neill/Bloomberg)
A metal ladder in a small room. (Photographer: Cooper Neill/Bloomberg)

In the previous article, we discussed how as a small investor, keeping yourself grounded will help you when investing. But there are unintended consequences of dumping mutual funds for richer investors as well. Their expectations have been raised, systematically, by a money-management industry that shares success stories of a few and hides the disastrous ones.

There are two popular investment vehicles available to people who have a large corpus. If you are a high net-worth individual or HNI, perhaps you would have invested in them? Let us bust some myths.

Equity Portfolio Management Schemes

A large part of research on portfolio management schemes gets reported in the following way, because that’s the form in which the data is available:

Here is why this does not quite convey the information an investor needs:

  • You cannot clearly see which scheme did well. This data is at the entity level. Many of these entities have multiple schemes. Some did well and some did not. This is at a consolidated level.
  • This does not have a clear bearing on how you would have done as an investor. This is because, we do not know how you have done in the previous year.

Let us say you had invested Rs 1 crore each in three schemes at the start of 2019 and the year was one of negative returns. At the end of 2019, let us say this is how your PMSes did and how your portfolio looked:

Now the next year, PMS C out performs A and B, and the year-to-date returns are reported as following:

Firstly, you are still underwater with your initial corpus. Second, PMS C is not the outperformer. It needs to do much better than 20% to just bring you at par, thanks to its inconsistent returns.

This does not get reflected in the annualised returns reported because PMSes are not pooled instruments, there is no NAV.

Your experience is entirely your own. That’s because your absolute return depends on how much money was put into the PMS at what point of PMS manager’s volatile cycle. A retrospective CAGR depiction of the returns will mask this volatility.

How do you choose your PMS? When it comes to mutual funds, there are many discussions in the public domain – about how one should not look only at past returns, how one should pay attention to the AMC’s process, how one should refer to the risk ratios like Sharpe Ratio and Sortino Ratio.

Where is all that data on PMS? It is a fragmented industry with no uniform norms in reporting.

Chasing PMSes that do well for years is no different from chasing stocks.

A handful of PMSes however, follow what is known as the Global Investment Performance Standards. GIPS removes survivorship bias and makes sure that returns are shown on an asset-weighted, time-weighted basis. You should understand this before you get swayed by the reported returns. Ask your PMS provider if they are GIPS-compliant.

Alternative Investment Funds

There is no 10-year return to discuss this relatively new vehicle. Besides, not all of them are long-only. Mostly, if there is any data available, it is on a consolidated fund-house basis and very little is available on a scheme basis.

There are many AIF schemes that do not get discussed in the public domain. The returns reports land softly as newsletters in inboxes and a little harder on the purses of HNIs.

One such fund is the Avendus Phoenix Fund. It is a Category – III Alternative Investment Fund that “invests in companies which are likely to profit from operating & financial leverage. The fund aims at capital appreciation over long term through long-only, sector-agnostic portfolio”.

A close look at the fund’s performance leaves one wondering if someone took the name ‘phoenix’—the mythical bird that burns itself to ashes to be born again—too literally.

The NAV as of June 30, 2020, is Rs 5,533 for class A1-2 securities. That is still a 45% loss. The Nifty has moved 3.28% in this period.

Here is another example, the IIFL Reorganize India Equity Fund:

The purpose of this analysis has been to set a context for assessing investment returns. Be wary of specious commentary about outperformance – lest it makes you move away from a system that is working for you.

To reiterate, if your entire portfolio has indeed compounded at a high single-digit rate, you are a subject of envy for many.

Much of what goes around as readily-available literature on equity vehicles is a glossed-up picture. As an industry, we have not yet reached a stage where everyone has to report uniformly.

Even today, mutual funds are the most transparent investment vehicle. That is also one of the reasons they get so much coverage. We have a lot of data at our disposal to dissect and learn from. Giving up on them may prove costly to you in many ways that are unseen and unintended.

Let me end with a message for the mutual fund industry – this is not a good time to get complacent. Investors tend to be sticky due to inertia and other such factors, but ‘hope’ and ‘greed’ are strong emotions as well. Keep investors from seeking greener pastures, by making your performance do the talking.

Abaneeta Chakraborty has close to two decades of experience in managing money for ultra-HNI families, and founded Abanwill Consultants LLP in 2017 to provide independent views on investing. She is also Visiting Faculty at Praxis Business School.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.