11 JUL, 2011, 01.30AM IST, UMA SHASHIKANT,
How the role of fund manager differs from a planner
The investors who have been worried about the lacklustre performance of equity markets are beginning to ask a simple question. If fund managers are experts in investment, shouldn't they have seen this coming and protected their portfolios?
After all, most people invest in mutual funds so that their money remains protected from uncertainty. This may be a common expectation from mutual funds, but it is completely wrong. Fund managers cannot directly manage risks for investors; they are not even privy to it. The confusion stems from the fact that the roles of a fund manager and financial adviser are often mixed.
Mutual fund products are not tailored to the needs of a specific investor. They are created to mimic an asset class. So a large-cap fund is expected to invest in a portfolio of large stocks and enable an investor to gain exposure to this asset class. What an active fund manager does is to try and perform better than a large-cap market index such as the Nifty.
An investor has the cheaper option of buying a passive index fund to get the same exposure. An active fund manager takes a higher fee to alter weightages in sectors and stocks in the large-cap universe to better the benchmark index. However, if this fund liquidates the equity portfolio and holds cash because the fund manager thinks that the market is due for a correction, the portfolio would actually move away from its mandate.
First, it will underperform the index if the cash call turns out to be wrong and the market moves up. Second, there is no reason for someone to pay a fee of 2.5% for holding cash when he can put it in a liquid fund at a cost of 0.35%.
It is the job of a financial adviser to review the investors' exposure to large-cap equity, take on board the downside risks at the time, consider the risk appetite of the investor, and recommend a tactical change in weightage. It is the adviser who is privy to the investor's return targets and risk preference, who should seek liquidation of the portfolio and advise the investor to hold cash. If the adviser has already done so, the fund manager's action is superfluous and can reduce exposure to equity more than is necessary.
The fund manager's specialisation is the bottom-up research in companies and sectors, as well as the selection, timing, assigning of weightages and rotation of stocks and sectors that he holds. The specialisation of the adviser is top-down research, which should indicate how asset classes will behave and, therefore, decide the weightage in an investor's portfolio. If the fund manager's job is to deliver relative performance, it is the work of the adviser to deliver absolute performance in line with the investor's needs.
http://economictimes.indiatimes.com/personal-finance/savings-centre/analysis/how-the-role-of-fund-manager-differs-from-a-planner/articleshow/9162198.cms
How the role of fund manager differs from a planner
The investors who have been worried about the lacklustre performance of equity markets are beginning to ask a simple question. If fund managers are experts in investment, shouldn't they have seen this coming and protected their portfolios?
After all, most people invest in mutual funds so that their money remains protected from uncertainty. This may be a common expectation from mutual funds, but it is completely wrong. Fund managers cannot directly manage risks for investors; they are not even privy to it. The confusion stems from the fact that the roles of a fund manager and financial adviser are often mixed.
Mutual fund products are not tailored to the needs of a specific investor. They are created to mimic an asset class. So a large-cap fund is expected to invest in a portfolio of large stocks and enable an investor to gain exposure to this asset class. What an active fund manager does is to try and perform better than a large-cap market index such as the Nifty.
An investor has the cheaper option of buying a passive index fund to get the same exposure. An active fund manager takes a higher fee to alter weightages in sectors and stocks in the large-cap universe to better the benchmark index. However, if this fund liquidates the equity portfolio and holds cash because the fund manager thinks that the market is due for a correction, the portfolio would actually move away from its mandate.
First, it will underperform the index if the cash call turns out to be wrong and the market moves up. Second, there is no reason for someone to pay a fee of 2.5% for holding cash when he can put it in a liquid fund at a cost of 0.35%.
It is the job of a financial adviser to review the investors' exposure to large-cap equity, take on board the downside risks at the time, consider the risk appetite of the investor, and recommend a tactical change in weightage. It is the adviser who is privy to the investor's return targets and risk preference, who should seek liquidation of the portfolio and advise the investor to hold cash. If the adviser has already done so, the fund manager's action is superfluous and can reduce exposure to equity more than is necessary.
The fund manager's specialisation is the bottom-up research in companies and sectors, as well as the selection, timing, assigning of weightages and rotation of stocks and sectors that he holds. The specialisation of the adviser is top-down research, which should indicate how asset classes will behave and, therefore, decide the weightage in an investor's portfolio. If the fund manager's job is to deliver relative performance, it is the work of the adviser to deliver absolute performance in line with the investor's needs.
http://economictimes.indiatimes.com/personal-finance/savings-centre/analysis/how-the-role-of-fund-manager-differs-from-a-planner/articleshow/9162198.cms
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