Secret Conversations

The global financial crisis has received a huge amount of press coverage, appropriately so. From ordinary individuals to mighty presidents and prime ministers, and all in between, everyone has given opinions that the media has carried in great quantity. I too have added my two bits to this cacophony, including in the pages of this newspaper.

Mutual funds is the industry I'm focused on and here, one thing that has struck me as notable is the increasing diversity between what many business people are saying in public and what they are saying in private. In recent weeks, the fund industry has fought through one of its worst crises. For many days, corporate investors were redeeming investments at a rapid pace and the liquidity to honour these redemptions has been difficult to come by for fund companies. In many ways, the intense wave of fear-stricken redemptions by companies has threatened to become a self-fulfilling prophecy. The redemptions have been provoked by a fear that there may be unforeseen losses in debt funds.

For many days I was struck by the huge gap between what fund managers and AMC CEOs whom I knew well were saying to me privately, and what they were saying publicly. To try and give this readers a glimpse of what fund professionals are thinking currently, I persuaded a very senior industry insider to have a frank conversation which could then be published as an anonymous interview. While the complete interview appears in Mutual Fund Insight, the magazine I edit, here are some of the more interesting things that my friend said, "What do you do when irrationality prevails? Some of our investors whom we serviced for a decade and with whom we are completely transparent and disclose our portfolios totally acted quite foolishly. They admitted that they were actually comfortable with our portfolios but someone higher up decided to pull out because of the bad publicity. One would not expect such an irrational decision from a non-retail investor… Personally and professionally, the worst part was when a lot of corporates opted for the path of least resistance and withdrew money knowing full well, that each of their redemptions would take us to the crisis point. All we wanted was for them to make a rational decision..."

My friend had this to say about investors, "We were dealing with corporate treasuries giving them the best of service and the best of returns... and when the crisis came, they walked away. On the other hand, we have retail investors who lost 50 per cent of their money in the equity crash and are still giving us money. Somewhere the industry's focus will have to shift from AUM gathering to getting quality investors in."

While the redemption crisis has been managed with the help of special liquidity provided by the Reserve Bank, it is clear that fund companies have learnt a bitter lesson about the relative value of different classes of investors. The business models of many fund companies will now change. Building large networks of retail investors and smaller distributors who add up to a mass of long-term investors is suddenly looking like the obvious thing to do.

At the end of the day, I think far too much fuss is being made out of corporates losing a per cent here or a per cent there. Out here, we've got small people--retail investors--who've lost half or more of their investments and are now settling down for a rebuilding process that could take months or years. That's a serious task, and these are the people who are the real long-term investors.