The perils of us ignoring simple investment options for exotic structures
19-May-2023 •Shyamali Basu
'Simplicity is the ultimate sophistication' - Leonardo Da Vinci
How difficult is it to do simple things? If we do a few basic things right and consistently, most of us will be well taken care of. Moderate exercise, good sleep and the right diet will be enough for most of us to stay fit. That said, it is not interesting and does not show quick results. Instead, we constantly search for a magical potion and spend more time researching what's new. Whether it is the latest fad in diet or exercise, that is what everyone I know does. This relentless pursuit makes all of us fall prey to the marketing gimmicks of those then-and-now testimonial pictures. The ubiquitous mantra is, "I want something more, and that too faster than others."
Almost everything else in life is similar, even personal finance.
It was just the other day I met a client. Very suave. Schooled abroad at one of the Ivy League universities. A seasoned investor. Had done well professionally and made smart investments in stocks. He was now wanting to discuss a new idea for investment. I urged him to share his list of investments to help me know where to start.
He had investments across five to six AIFs and a similar number of PMS accounts. "Is there a specific mandate for me when constructing the portfolio?"
He wanted smart solutions and curated portfolios. He explained strategies like long-short, crossovers, upside participation, etc., to me. I asked him if he was satisfied with his investment choices. He clearly was not. In fact, almost 40 per cent of his investment ideas had left him unhappy. He was looking to switch to other options that showed promise.
My 'naive' question to him was if he owned mutual funds. I could see his expression change. His face screamed: "Was he talking to a person who knows the psychology of an HNI (high-net-worth individual)? It is a product that gets advertised all over. Even my driver has an SIP."
I stuck to my guns on two accounts. Simple products like a mutual fund were for the masses, classes, and the very elite. Secondly, returns cannot always be high for all portfolios.
There are so many advantages mutual funds have over other complex products. They are more tax-efficient, cost-efficient, well-regulated, transparent and professionally managed; they also have concentrated strategies, a cap on expenses and lower investment thresholds. Moreover, the fund's objective is known, and there are options for asset allocation. If one wants sectoral exposure, mutual funds have that option too. In short, mutual funds offer multiple options.
So, what is wanting in such an easy option? Is there empirical evidence that complexity creates alpha? Is there a basis for a PMS manager to have a secret sauce available to only his investors and not the masses? Are they not more expensive products, if we add the operational costs and, in some cases, the profit-sharing arrangements?
On the one hand, clients worry about costs in regular plans and on the other, they succumb to more expensive complex structures.
That's human psychology, I guess. Exotic structures are believed to do better than portfolios owned by others (read masses). It becomes a status symbol in a party to claim that so-and-so fund manager visited them recently to share (a new-fangled) strategy. To that, I ask: "If it is that good a strategy, why was the manager hawking that idea?" Because if I am happy with a strategy, I will invest more in that strategy. Why try something different now? That is another problem. Investors almost always chase returns. They board a bus without realising where the product is in its cycle. They simply want the fastest driver.
There is proven data that simple diversified equity funds have delivered staggering performances. But do they provide exclusivity? I strongly feel the core portfolio should comprise simple products. Frills could be built after that. So, my advice to the client was to focus on simple strategies and build a mutual fund corpus instead of looking for the new exotic 'killer idea'... I guess I became his idea killer.
Shyamali has been navigating the asset management world for over 20 years, working with everyone from the seasoned super wealthy to absolute beginners. She has a knack for understanding the human side of investing and empathising with investors, something that shines through in her writing. She can be reached at [email protected]