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Are You Being Processed?

Despite all the 'process-driven' happy talk spouted by AMCs, fund management is a business in which people matter and finding and retaining good fund managers is a crucial part of running an AMC

Last month, the analysts' team at Value Research conducted an exercise to identify the fund managers with the best long-term track records. But this study, which was done for a major business magazine, had to be abandoned because there were very few fund managers who had managed the same fund for any appreciable length of time.

Fund managers in India routinely change jobs and the general idea seems to be that continuity of fund management does not matter. Fund companies' CEOs say a lot of things about 'the process' being more important than the person. This sounds like such a perfect copybook 'good management' statement that one tends to accept it without too much critical examination. And in fact, in the past, we at Value Research have ourselves taken such statements at face value and said that investors should be wary but not really get too worried when the fund manager leaves.

That's generally true but there's a nuance to it. While the departure of most fund managers doesn't matter, some of the best long-term performance comes from fund managers who've been around with the same funds for a long term. This is not rigorously provable but a careful look at some AMCs confirms it. Prominent examples are HDFC's ex-Zurich funds, Reliance and Franklin-Templeton. One has to be careful not to confuse cause and effect here. I'm not suggesting even for a moment that just sticking around can create a good fund manager.

What I'm saying is that despite all the 'process-driven' happy talk spouted by AMCs which don't have stable and/or good fund managers, fund management is a business in which people matter and finding and retaining good fund managers is a crucial part of running an AMC.

Why is this so? Why can't 'process', which is an idea so close to the heart of modern management, substitute for whatever secret sauce it is that good fund managers have? The answer is that because it can't. There are some activities that are built on a foundation of process but on top of that also require instinct and creativity and experience and talent and other things like that which no amount of process can substitute. Such activities are characterised by the size of the gap between the performance of the good and that of the merely average.

Clearly, managing equity investing over a long-term is one such activity. Over periods like five to ten years, the best fund managers increase your money not just a little bit more than the average ones, but many, many times more. This takes more than 'process' (or even worse, 'due process'). It takes actual talent. And mind you, blind luck is a good replacement for talent only in the short-term and even then mostly during bull-runs.

Process alone is sufficient for things like sending account statements, not fund management.

All this is relevant for us as investors because while choosing a fund we need to focus on the right factors.

The main (only?) reason for investing in a mutual fund is that the fund manager makes better investment decisions than most of us can do individually. When an investor puts money into a fund, what he is basically trying to do is to hire a good fund manager. AMC managements should try to do the same instead of winging it with lots of hype and some heavy process spin.