A couple of days ago, I was looking at an analysis of mutual funds' investment returns during 2007 that my company's data research team had generated. While looking at reports like these, an investor would generally be interested in the top ten or twenty funds to see which mutual funds performed the best. However, for a professional analyst like me, the worst-performing funds hold just as much-if not more-interest than the best performing ones. On the general principal of learning from mistakes, observing what didn't work, and figuring out why it didn't work is just as useful analysing the winners.Interestingly, the list of the ten worst-performing funds of 2007 reinforced what I wrote about last week-that generic funds are much better investments than specialised funds. The entire list-without exceptions-is made up of specialised funds. This stands to reason-specialised funds are generally based on a very specific investment idea. When a narrowly-defined idea works it works but when it doesn't work it generally fails badly. A generalised funds' investment manager can move to something else but a specialised fund
is imprisoned in its own definition.
It's also interesting to see exactly which ideas are over-represented at the bottom of the list. What jumps out the most is that three of the ten are MNC funds. These are funds that specialise in investing in multinational companies. There was a time when MNCs were considered to be better investments than equivalent Indian companies. I don't know whether this was a hangover from the days when anything foreign was supposed to be better than anything Indian but those days are long gone. This is one investment idea which time has passed by. Today, the old generation listed MNCs are just a shadow of their formal selves and the new generation ones are generally unlisted and in any case are cost-plus operations that don't leave much profits in the Indian entity. Curiously, despite the fact that investing in MNCs in India is an idea that is long past its expiry date, these funds' asset base hadn't declined much. This is true of many other specialised funds also. Clearly, investors don't have the time or the expertise to monitor their investments and once money is put in a fund, it tends to stay there till it's needed. Many of the other residents of the worst funds list belong to a class that I would call the unspecialised specialised funds. These are funds that are specialised but have ill-defined and imprecise specialisations. I mean when I invest in an MNC fund or an IT fund or an Infrastructure fund I at least know what I'm getting. But when the specialisation is supposed to be in 'Special Opportunities' or 'Globally Advantaged Indian Companies' or some such vague thing, then one knows that these are just phrases floating in and out of Powerpoint slides and have basically been invented for marketing purposes. Generally, these are copycat definitions. One fund companies' 'Opportunities' fund does well so half a dozen more also launch funds with the word Opportunity in the name.
All in all, a comparison of 2007's best and worst funds confirms the fact that execution is more important than concept and that something simple done well is better than something that tries to be special.