Investing with experienced mutual fund managers is a time-tested strategy. These industry veterans have established track records, which enables an investor to more easily learn about the managers and establish a comfort level with their strategies and credibility. Research providers make the search for data even easier. But what about the rookies? New funds are launched all the time, and fund managers with new ideas sometimes deliver impressive growth right out of the box. How can you tell if a new fund will be a winner or a loser? How do you know if you should take a chance on a new fund? Read on to find out.
Look Before You Take a Chance
While investing in a new fund might seem like taking a shot in the dark and hoping for the best, first impressions can be deceiving. Although a specific fund might be new, it's possible that it is being run by an experienced fund manager with a long and distinguished track record. Likewise, the fund complex itself could have a strong history of launching successful new products. Nothing is certain, and even veteran managers can stumble, but there are many ways to research a new fund before you decide to add it to your portfolio.
Managers
Start by doing research about the fund manager. How long has the manager been in business? How much of that time was spent running a strategy that is similar to the new fund? Was the previous fund successful?
You'll also want to find out how long the manager has been with his or her current employer. If the manager has had a long tenure with the organization, what role did he or she play before taking over the fund? Has the manger been in the business long enough to have seen both bull and bear markets? Determining the answer to these questions will help you figure out whether an experienced manager is running the show, an experienced assistant manager is now taking the helm of his or her own fund, or if a true rookie is making a debut.
Fund Complexes
Next, thoroughly review information about the fund complex. Is the rookie fund the latest product from a reliable old fund complex? Does the organization have a long history with the type of strategy the new fund offers? Many firms specialize in small cap, growth, value, socially responsible and other strategies, and have strong track records of launching successful offerings. In many cases, a new fund is managed in a manner similar to an existing product. When a new fund is similar to an existing strategy, the name of the new fund sometimes provides insight into this type of scenario. Names, such as Large Cap Growth I and Large Cap Growth II generally denote situations where strategies are similar. You'll want to know if the fund complex has a good track record of launching funds that last and whether they have historically lowered fees as assets under management have risen.
The Fund
The fund itself is also a valuable source of information. To learn about the fund, read the prospectus and check the fund's track record - even if it's short. How did it fare against its benchmark in terms of returns, alpha, beta and turnover? Does the fund's history demonstrate a rigorous adherence to the stated investment strategy? Are the fees high or low when compared to similar, competing funds?
Take a Chance on a Rookie?
While time-tested strategies and tenured managers appeal to the risk-averse among us, the opportunity to take a chance on a rookie in the hope that you find the next all-star player can be a power draw. If you can resist the urge to take a chance, be sure to thoroughly research the fund before investing.
If you do all of the research that you can and still like what you see, it could be time to put down the money to invest in a few shares of the fund. Adding a rookie fund to your portfolio should, like all risky moves, be done in moderation. Put a small amount of your assets in the fund as part of a well-diversified portfolio. If the manger does well, you will enjoy the gains. If the manger doesn't do well, the bulk of your portfolio will not be exposed to the damage.
Sunday, December 28, 2008
Wednesday, December 17, 2008
The Great Satyam Robbery
For sheer scale and audacity, the Rs 6,000 crore heist that Satyam promoter Ramalinga Raju attempted is breathtaking. Yesterday, the Satyam board of directors approved the acquisition of Maytas Properties and Maytas Infra for USD 1.6 billion. These two companies are promoted by Mr. Raju's son.
It's no secret that no one is willing to invest in real estate companies. Under the circumstances, this deal boils down to Mr. Raju just giving away a gigantic sum of money to his son.
Incidentally, independent directors on the board include Harvard management guru Krishna Palepu, International School of Business (ISB) dean Mendu Rammohan Rao, and former Cabinet Secretary to the Government of India T.R. Prasad. These distinguished luminaries owe some explanations to the non-promoter shareholders whose interests they were supposed to be guarding.
As things stand now, the company has pulled out of the deal. This is not surprising, given the strong reaction from investors. Overnight, the stock's US-listed ADRs lost 55 per cent of their value.
What will Mr. Raju do now? Well, if my understanding of the typical Indian promoter is correct, he will already be hard at work figuring out a smarter way of taking out the money. Let's face it; this type of theft is very much business-as-usual in India. Promoters have myriad ways of enriching themselves at other shareholders' expense. The only mistake the Rajus made was that they tried a method that is more suitable for smaller companies that don't have heavy institutional shareholding and foreign listings. I guess Maytas must be in deep trouble and they must have been desperate.
It is also logical to speculate that there could be some deeper reason for this desperation. Given what has happened to some other promoters recently, it wouldn't come as a surprise to anyone if it turns out that the Rajus' own stake in Satyam is under some sort of a threat.
Incidentally, the promoters' stake in Satyam is merely 8.6 per cent while institutions hold more than 60 percent. It is possible that Mr. Raju will now see institutions forcing changes in the board and possibly in the management. The 8.6 per cent that Mr. Raju controls was worth just Rs 1300 crore, even before the stock price crashed today.
My sense is that we'll be seeing more of such shenanigans now. For about five years, promoters could make enough money by exploiting the rampant capitalisation increase that was happening on the stock markets. Overvalued IPOs was the method of choice till January 2008. Now, that route has been shut off, Mr. Anil Ambani's Reliance Power having been the last successful exploit of that type.
From now on, poor promoters will have to rely on older, more direct methods like Mr. Raju attempted. But make no mistake, he has been thwarted only because his company was too big and the size of the heist was too big. I'm sure such methods must be working well in smaller companies.
By Dhirendra Kumar of VROL_________
It's no secret that no one is willing to invest in real estate companies. Under the circumstances, this deal boils down to Mr. Raju just giving away a gigantic sum of money to his son.
Incidentally, independent directors on the board include Harvard management guru Krishna Palepu, International School of Business (ISB) dean Mendu Rammohan Rao, and former Cabinet Secretary to the Government of India T.R. Prasad. These distinguished luminaries owe some explanations to the non-promoter shareholders whose interests they were supposed to be guarding.
As things stand now, the company has pulled out of the deal. This is not surprising, given the strong reaction from investors. Overnight, the stock's US-listed ADRs lost 55 per cent of their value.
What will Mr. Raju do now? Well, if my understanding of the typical Indian promoter is correct, he will already be hard at work figuring out a smarter way of taking out the money. Let's face it; this type of theft is very much business-as-usual in India. Promoters have myriad ways of enriching themselves at other shareholders' expense. The only mistake the Rajus made was that they tried a method that is more suitable for smaller companies that don't have heavy institutional shareholding and foreign listings. I guess Maytas must be in deep trouble and they must have been desperate.
It is also logical to speculate that there could be some deeper reason for this desperation. Given what has happened to some other promoters recently, it wouldn't come as a surprise to anyone if it turns out that the Rajus' own stake in Satyam is under some sort of a threat.
Incidentally, the promoters' stake in Satyam is merely 8.6 per cent while institutions hold more than 60 percent. It is possible that Mr. Raju will now see institutions forcing changes in the board and possibly in the management. The 8.6 per cent that Mr. Raju controls was worth just Rs 1300 crore, even before the stock price crashed today.
My sense is that we'll be seeing more of such shenanigans now. For about five years, promoters could make enough money by exploiting the rampant capitalisation increase that was happening on the stock markets. Overvalued IPOs was the method of choice till January 2008. Now, that route has been shut off, Mr. Anil Ambani's Reliance Power having been the last successful exploit of that type.
From now on, poor promoters will have to rely on older, more direct methods like Mr. Raju attempted. But make no mistake, he has been thwarted only because his company was too big and the size of the heist was too big. I'm sure such methods must be working well in smaller companies.
By Dhirendra Kumar of VROL_________
Sunday, December 7, 2008
Equity works, if we follow the rules
This is that time of the year when the knives are out for equity. While the Left makes political cakes out of ashes in the market, there is genuine confusion among lay readers and investors. Writes Dr Viraj Shah of Ahmedabad: “The Dow Jones was around 66 a century back and today it is around 8,500, giving a CAGR (compounded annual growth rate) of only 5 per cent. The Nikkei was 7,162 in 1982 and was at same level after 26 years a week back, which means negative returns taking inflation into account. Then why it is said that equity has given the best returns of around 12 per cent over long periods? I think that 100 years or 26 years are long enough investing periods. Is it true that equity as an asset class has given maximum returns over the long term? This is an utterly confusing situation.”
Valid question. But we need to look at point-to-point comparisons very carefully. By choosing dates I can either get the market to perform very well or very badly. Simply pick a year in which markets have done badly and compare to a year of stock boom to show performance or the reverse. One way out of this statistical bias is to use what are called ‘rolling returns’. Let’s see what you would have earned as return if you had bought the Sensex on any day from 3 April 1979 to 7 November 2008 and held that investment for a year. Across 29 years, your maximum return would have been a fantastic 265 per cent and worst loss 56 per cent. Now, what if you held on for two years? Or three? As the number of years that the investment is held goes up, the gap between the minimum and maximum return goes down, or, in jargon, the volatility reduces. After five years, the minimum return (or loss) is minus 8 per cent and the maximum return 56 per cent. After 10 years, you lose 3 per cent but gain 35 per cent. At a holding period of 14 years, the minimum return is 5 per cent, the maximum is 29 per cent. This means that if you held the Sensex over any 14-year period from 1979 till 2008, the minimum return would have been 5 per cent, or you would not have lost money. And over a 25-year period, the average return is 14 per cent.
But you cannot eat average return, you say. Sure, you cannot. Therefore, you have this wonderful tool called rebalancing your portfolio that allows you to book profits of the asset class that is rising and invest in the class that is not. In the research period, there have been years of super-normal returns. Those are the years in which to book profits and move money to the safer asset class of debt. Keeping your overall asset allocation in mind, the move should be from debt to equity when the reverse happens. Long-term investing will work only if you follow the rules, just as your car will move forward only if you learn how to drive. If you choose not to learn driving, it is best to hire a driver, or an asset-allocating lifecycle fund that will do the rebalancing for you automatically. So, yes, equity works, but we need to follow the rules.
Editor, Outlook Money____
Valid question. But we need to look at point-to-point comparisons very carefully. By choosing dates I can either get the market to perform very well or very badly. Simply pick a year in which markets have done badly and compare to a year of stock boom to show performance or the reverse. One way out of this statistical bias is to use what are called ‘rolling returns’. Let’s see what you would have earned as return if you had bought the Sensex on any day from 3 April 1979 to 7 November 2008 and held that investment for a year. Across 29 years, your maximum return would have been a fantastic 265 per cent and worst loss 56 per cent. Now, what if you held on for two years? Or three? As the number of years that the investment is held goes up, the gap between the minimum and maximum return goes down, or, in jargon, the volatility reduces. After five years, the minimum return (or loss) is minus 8 per cent and the maximum return 56 per cent. After 10 years, you lose 3 per cent but gain 35 per cent. At a holding period of 14 years, the minimum return is 5 per cent, the maximum is 29 per cent. This means that if you held the Sensex over any 14-year period from 1979 till 2008, the minimum return would have been 5 per cent, or you would not have lost money. And over a 25-year period, the average return is 14 per cent.
But you cannot eat average return, you say. Sure, you cannot. Therefore, you have this wonderful tool called rebalancing your portfolio that allows you to book profits of the asset class that is rising and invest in the class that is not. In the research period, there have been years of super-normal returns. Those are the years in which to book profits and move money to the safer asset class of debt. Keeping your overall asset allocation in mind, the move should be from debt to equity when the reverse happens. Long-term investing will work only if you follow the rules, just as your car will move forward only if you learn how to drive. If you choose not to learn driving, it is best to hire a driver, or an asset-allocating lifecycle fund that will do the rebalancing for you automatically. So, yes, equity works, but we need to follow the rules.
Editor, Outlook Money____
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