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Investor Education

When equity funds get greedy and change mandates, suddenly you're at their mercy

Every good quality offering has a finite capacity defined by the ability to maintain consistent inputs and adherence to process – all of this assuming one wants to maintain consistent output.

Greed is good? Naaahhhh!!! 

 

Not when it comes to delivering performance in a process-oriented manner to long-term investors, and definitely not if one wants to stick to the promise of a defined mandate. 

 

I am yet to meet a chef who assures me that she can maintain the same quality value of servings at a consistent price in the face of unlimited guests and a dilution in quality of available raw materials! 

 

Every good quality offering has a finite capacity defined by the ability to maintain consistent inputs and adherence to process – all of this assuming one wants to maintain consistent output.

 

Managing money in stock market is a game of probabilistic outcomes. Whatever we may say, none of us in the market controls share prices or our NAVs! What we do control is what kind of companies we buy; what is the quality of earnings – defined by rate of growth and longevity of growth that these companies can produce and, most importantly, what level of understanding we have of these dynamics. 

 

When you play a game with probabilistic outcomes, where you do not control the outcome; what you can only control is the consistency and quality of inputs. Our stock market is not such that you can maintain the quality of companies or quality of stock picks - whatever your filters may be - in the face of unlimited fund size. Every strategy has a capacity. 

 

But most fund managers, especially AMCs, are influenced by Gordon Gekko in Wall Street. 

 

Greed is....! Uh oh!

 

When a fund size runs out of capacity – they change the filters; they change what they are looking for – most certainly a smallcap fund would start buying midcaps – either by changing the mandate, or worse, by changing the definition of what smallcap means. 

 

A successful midcap fund eventually becomes multicap and an unsuccessful multicap fund becomes dynamic, and so on and so forth. 

 

What does it mean to existing investors? Simply put, you no longer own what you originally bought. The size has become big and the same strategy cannot be executed with same quality focus and the number of stocks goes up to 60-70, its financial democracy, midcap is now $6-7 billion market cap and you are seeing or likely to see dilution of returns. 

 

You board a bus, which was point to point and air-conditioned. Now, the bus company wants to load more passengers – the bus will stop at more stops, some people will sit on the edge of your seat or stand on your head and the air-conditioning may get switched off and windows opened when lot of people feel claustrophobic. 

 

All the best...

Aashish Sommaiyaa, MD & CEO of Motilal Oswal AMC.

 

Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.moneyfront.in. This article was first published on ET Markets Online. This article has been provided by Motilal Oswal. 

 

Motilal Oswal Mutual Fund | Nov 07, 2017