Fund managers are mutual fund industry's most celebrated figures. However, they work within the
. These have a much larger bearing on returns than we realise.
MUST SEE: India's Best Mutual Funds The processes and rules relate to stock-picking, sectoral exposure, booking of profit/loss, churning and cash holding. Some investment restrictions are regulatory.
Then there is the scheme's mandate. For instance, the mandate it says the
scheme will invest in large-cap stocks, the fund manager cannot deviate from this and buy mid-cap stocks. They of course have flexibility to buy or sell securities within these limits.
STOCK-PICKING STRATEGIESThe two stock-picking strategies adopted by fund houses are top-down and bottom-up approach. Some fund houses use both.
In the former, the fund manager looks at the overall economy and zeroes in on sectors and stocks that can benefit from the prevailing scenario. In bottom-up approach, the
fund manager usually focuses on fundamentals of companies irrespective of the overall economic situation.
"We follow a bottom-up approach to select stocks based on fundamental research with a medium- to long-term perspective and ignore momentum stocks," says Anand Radhakrishnan, senior vice president and portfolio manager, equity, Franklin Templeton Investments.
Depending on the scheme's mandate and the fund house's strategy, a fund manager can either pick growth stocks (with good growth potential but high valuations) or value stocks (cheap with good growth potential) or both.
For example, Religare Tax Plan, a four-star tax-saving scheme, focuses more on growth-oriented companies. "We back growth-oriented businesses, particularly in the mid-cap space," says Vetri Subramaniam, chief investment officer, Religare Mutual Fund.
TEAM WORKA team of researchers and analysts helps the fund manager prepare a list of securities that meet the criteria of the fund house and the objective of the scheme. The team also mines for stocks which can be a good investment and tracks companies in which the fund has already invested.
Each fund house has an investment panel that includes the chief investment officer, fund managers and research analysts. It reviews performance of schemes and market outlook as well as prepares the investment strategy.
We believe that consistent application of our research and process will produce superior long-term performance with less volatility than the market.
Apoorva Shah
Executive Vice President and Fund Manager, DSP BlackRock Mutual Fund
This panel vets all investment proposals, which mention the background of the management, business outlook, financial analysis/valuation and reasons for the recommendation.
Neelesh Surana, head, equity, Mirae Asset Global Investments, who manages Mirae Assets India Opportunities Fund, says the research team contributes both in generating ideas and coverage of investee companies.
Apoorva Shah, executive vice-president and fund manager, DSP BlackRock Mutual Fund, says, "We believe that consistent application of our research and process will produce superior long-term performance with below-market volatility."
SECTOR EXPOSURESome fund houses adopt a sector-agnostic approach in which they use bottom-up stock-picking and do not take sector calls.
"Our focus is on quality through bottom-up approach rather than taking top-down sectoral calls and in that sense our sectoral exposures are a derivative of individual stock exposures," says Anand Radhakrishnan of Franklin Templeton. Fund houses like these may have a view on a large theme like domestic demand-driven businesses rather than a sector.
However, there are schemes which, depending on their objective and nature, can take conscious sector calls.
For example, UTI Opportunities Fund takes concentrated bets on four-five sectors. "Though there was a fund manager change in 2011, the fund's investment style and portfolio characteristics have remained the same-large-cap bias, 35-37 stocks portfolio and focus on four-five sectors," says Anoop Bhaskar, head of equity, UTI Mutual Fund.
ON TIGHT LEASHCash holding and portfolio turnover are two areas where mutual fund companies give clear guidelines to fund managers. A fund's nature and objective also have a significant bearing on the fund manager's cash strategy.
20 per cent is the portfolio turnover ratio of HDFC Top 200, one of the lowest in the large- & mid-cap equity diversified category
For instance, ICICI Prudential Dynamic Fund, a large- and mid-cap asset allocation fund, has a mandate for large cash holdings when equity markets are at a high. At the end of December 2010, its 20 per cent portfolio was cash. But for most equity funds, the cash limit is 10 per cent.
Chintan Haria, senior fund manager, ICICI Prudential AMC, says, "We do not believe in taking cash calls. Our cash holding is limited around 10 per cent, except in funds that have a mandate to do so.
"Cash to us is a residual strategy. When we do not have a good stock to buy, we hold cash and wait for an opportunity to deploy it," says Huzaifa Husain, head, equities, AIG Investments, India.
Another strategy fund managers adopt to generate high returns is frequent churning, but not all fund houses give fund managers a free hand in this regard. A low portfolio turnover ratio means the fund manager is holding stocks for longer periods.
HDFC Mutual Fund schemes such as HDFC Top 200 and HDFC Equity have the lowest portfolio turnover ratios in the industry. The average portfolio turnover ratio of HDFC Top 200 in 2011-12 was 19.7 per cent and that of HDFC Equity was 33 per cent. Compare this to DSPBR Top 100 Equity's average portfolio turnover ratio of 251 per cent, DSPBR Equity's 185 per cent and Franklin India Bluechip's 65 per cent.
Leaving everything to the fund manager's strategy may spell trouble for the scheme if its fund manager moves on.
Having a basic fund management framework at place ensures a scheme does not collapse on such exits.
