Friday, April 20, 2012

Why there are no 'star managers' in Indian mutual fund industry

Vicky Mehta, Senior Research Analyst, Morningstar India

An oft-repeated phrase in the Indian mutual fund industry is "we don't have a star manager culture; instead we follow a team-based, process-driven investment approach".

Fund companies avoid the term 'star manager' like the plague. They never miss an opportunity to proclaim the presence of a strong team and investment process. But are the latter and 'star managers' mutually exclusive? More importantly, what is so revolting about being a 'star manager'?

Think about it, isn't a 'star manager' only like any other professional who excels at his work? For instance, an equity fund manager who has consistently delivered an impressive showing over the long haul and across a market cycle, and who displays a sustainable level of skill, should qualify as a 'star manager'.

That isn't necessarily bad, is it? To draw a cricketing analogy - is having Sachin Tendulkar in the team a disadvantage, simply because he ranks among the best batsmen in the world?

The disapproval
Perhaps the disapproval for star managers stems from certain preconceived notions. For instance, being a star manager is associated with job-hopping. But that isn't always true.

Several of the best-ranked managers in the country have been associated with the same fund company for a decade or thereabouts. Maybe star managers are perceived as being mavericks and poor team players.

Again that hypothesis is questionable. Some of the best managers have built strong and stable investment teams. Several of them have also tended to adhere to an investment style that gels well with the fund company's approach.

Acknowledging key-man risk
Clearly there's more to this star manager aversion. Let's revisit the point about star managers and a team-based, process-driven approach being mutually exclusive.

Fund companies would like us to believe that all members in their investment teams think alike and every decision is based on consensus. But that's rarely the case. Let's not forget that investing is a personalised activity with no definite rights or wrongs.

This in turn, necessitates the presence of skilled managers. Furthermore, while the significance of a robust investment process cannot be overstated, it takes a proficient manager to skillfully execute the process. For instance, a model might throw up a list of 'investment-worthy' stocks; but it is the manager who decides which ones to buy.
If strong investment processes in isolation were adequate, all funds could have been run on quant models and managers would have been redundant. Here's what this boils down to - fund companies try to underplay the key-man risk associated with funds, by declaring that they don't have star managers.

At best it's a defense mechanism to ensure that they don't lose assets when a proficient manager exits. Neither would they like to acknowledge that a manager change can result in a change in the fund's character. Indeed, the degree of keyman risk varies and needs to be estimated on a case-by-case basis.

In some situations, it might be easy for a new manager to step in and run the fund as in the past; while in others, it may not be possible to do so. Nonetheless, it is naive to dismiss manager-risk as being immaterial.

Fund companies deny the existence of 'star managers' to understate key-man risk; investors on their part, must evaluate if the fund remains as good a bet, sans its 'star'.


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