In investing, the word 'story' is used a little too much in the sense that a company has to have a good story to be invested in. 'What's the investment story?' is a frequently used phrase. Generally, this is a problem because the story becomes a little too story-like. I mean people like stories and if the story has a few twists and turns and some suspense and a climax, then it feels more exciting.
Unfortunately, this natural liking for stories also has implications for mutual fund investing, where it does even more harm than it does for companies. Over the years, mutual fund companies have tended to launch more funds with stories because, I guess, stories can be sold more easily.
Here's an example which I'll call hypothetical but is actually distilled from many real life cases. Two mutual fund salesmen approach you with a pitch to get you to invest in two different funds. Salesman A has a new fund that, according to the fund company, is designed to exploit the coming shift of economic power from the hitherto developed countries to the emerging economies. In this fund, the investment managers are supposed to specifically choose those companies which are in businesses which will benefit from this shift. The sales literature goes on at length about this coming shift and paints a convincing story of why this shift is inevitable and how some businesses will be able to take advantage of it and some not.
Salesman B, on the other hand, tells you about an existing fund, one that's been around for almost two decades, which has a reasonably good track record and invests in a broad selection of sectors and companies and ensures that it's well-diversified at all times. And that's all there is to fund B.
It doesn't take much insight to see which of these is going to attract more attention and capture more mindshare than the other. Fund B has no obvious story, or at least it doesn't appear to have one. In reality, Fund B has a hell of a story because it's a true story. It has actually happened and chances are that it will continue to happen. In sharp contrast, Fund A has a fairy tale. It may happen, it may not. Even if it's an older fund unlike the specific hypothetical one in this example, there's no telling when the story may get derailed.
Although such egregious examples of new funds with outlandish stories have thinned out because of SEBI's cleanup, there are plenty of strange themes and stories in the list of mutual funds that are being actively sold. However, let's step back from this specific example and tackle the idea of the story itself. In my experience, an individual investing on the basis of a story is almost never an isolated event. Those who like stories really love them. They'll easily have five or ten or even more thematic funds in their investment portfolios. When they go wrong with a story fund, they conclude that there was something wrong with that particular story. Actually, they should be doubting the very idea of story-driven investment choices.
Diversified (maybe I should say storyless) funds with a good track record are always a better choice because they are a superset of all those storytelling funds. This is the key point I'm making. Maybe some stories make genuinely good investments at some point. In the past two-three decades, from tech to pharma to infra to consumer goods to banks, a time has come for every story.
The question to ask is whether it's your job, as a mutual fund investor, to choose which story makes sense when? Surely not. That's the job of the funds and their fund managers. Your job is to choose between them, and then to keep an eye on them, something which is easily done on a mutual fund website like Value Research Online.
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