Most wanted underperformers?

Most wanted underperformers?

Keep in mind that even fund managers steering those massive mutual funds can go wrong. They are after all human and can be misled by erroneous and (sometimes) devious information they get from managements and analysts.

Dipen Sheth
Dipen Sheth

Stock picking can’t get easier, can it? There’s an army of qualified, gifted and rather well-paid fund managers out there on Dalal Street, working for the top mutual funds in the country. And their “top picks” have been culled out by the editors of this magazine for your personal investing pleasure. So go ahead and shoot your money at these most wanted of stocks and presto...see it multiply.

Caveat emptor, screams my inner sense. Ask yourself, why does a fund manager buy a stock? Indeed, why do many fund managers converge on to a stock with ammunition? Mostly in the conviction that the company is going great guns in its business and the stock will earn handsome returns, you’d guess.

Guess again, dear reader, because the list compiled in this issue has some “items” that surely could not have inspired such lofty ambitions. A quick look at the corporate performance of the underperformers in the most-wanted list will tell you that the stock’s relative underperformance in the market has a sane reason.

So here are some good reasons why the “most wanted” stocks may not perform:

Bad stock picking

Surely you need to allow for the fact that our gifted friends steering those massive mutual funds can go wrong. After all, they are human and can get misled by the erroneous and (sometimes) devious information that they get from managements, brokers and analysts. And, of course, they can make their own errors of judgement.


Some of the “most wanted” stocks may have hit their foreign institutional investment (FII) ceiling already, and are hence off the radars of FII buyers. This can affect their price momentum adversely.

If the big guys from Hong Kong, Switzerland, Dubai and Mauritius are not gunning for your favourites simply because the law does not allow them to, how will prices ever move up? Maybe Indian mutual funds will buy more. Keep hoping!

Stock% return(1-year)Value of fund holdings (Rs cr)Volume of holdings*Number of funds**
Zee Entertainment-16.371,628.93663.3693
United Phosphorus7.981,013.97284.1857
Ipca Laboratories12.88266.63613.520
* Lakh shares; ** Number of funds holding the stock; Returns as on December 6, 2007.

Sectoral allocation

In a diversified equity fund, there is always some pressure on the fund manager to include sectors where traction is not immediately visible or likely. Else why would anyone want to allocate significant weights to sectors like textiles, auto components, pharma and oil refining when there is hotter stuff like capital goods, construction, telecom and finance?

Yes, there are some exceptionally good companies in depressed sectors and you can make money on them. But more often than not, fund managers pick the standard representatives in a sector. In their laziness, they lose the opportunity to find the better contrarian plays.

Good story gone sour

This is a little like bad stock picking, except that it begins as good stock picking. I’m afraid this happens all the time in the business of fund management. There’s nothing wrong about having made Infosys the top-weighted stock in the fund. Except, of course, the evolving fundamentals.

Who could have guessed that portfolio and foreign direct investment inflows into India could more than make up for the rapidly inflating oil import bill, and that the rupee would appreciate to Rs 39? There may be hope yet for revival in such high-quality lemons, if the fundamental reasons why they were good in the first place persist.

Denial syndrome

Business and corporate risks routinely pop up to play truant with fund managers’ grand designs on stocks, after they have been bought for the fund. But shouldn’t they be selling such stocks? I have seen scores of otherwise responsible stewards of money painfully holding on to stocks where the story has gone sour.

We are all reluctant to book losses, and some fund managers are as prone to this bad habit as most of us. I call this the denial syndrome. Which is why you might see the stock in quite a few funds, and yet miss out on the money making.

Timing errors

It’s always possible that our list of most wanted stocks includes a couple of stocks that deserve a sell after many months or years of patient holding, but that the selling has not yet started. Add to this the possibility that you have bought it on a bad day at an unreasonably high price, and you could land up with a double whammy of bad luck.

No apparent reason

This is the toughest to digest and yet it happens all the time. The company’s fundamentals are top-notch and the management is first class. And the performance that’s being dished out is also decent. But the stock refuses to move. Usually this happens because the people who think it should move up do not have all the information that’s needed. Or they simply lack buying power.

Then, of course, there are the genuinely inexplicable non-performing stocks that have the entire market stumped. In such cases, you (and your favourite fund managers) just need to be patient and wait it out. Till someone notices the value available at a bargain price, and triggers a buying stampede…

By Dipen Sheth, Head of Research, Wealth Management Advisory Services. He can be reached at