Indian
benchmark indices are at a lifetime high and
hundreds
of stocks that have been the market darlings are at their yearly and
some 2-yearly lows. This fall has been precipitated in a matter of last -mere 5
months.
Obviously most
of the fund managers (mutual funds, private wealth, PMS schemes) are finding
corners to hide where they can find respite and concoct some solid theories and
reasons for wealth destruction last seen only in 2008-2009 – after all these
were the very same guys on CNBC, just very recently, who were chuffed at their
stellar performance and recommending shares ala Vakrangee Manpasand and PC – forgetting
that it’s a unusual proxigean spring
tide. And as we have all heard before -- that all s*^@# rises in a high tide.
Some fund
managers like Porinju
(having faced perhaps the maximum erosion in their recommended portfolios) have
been graceful enough to publicly accept the same and have learnt their lessons.
I have great respect for people who have a clear intent and are quick to
concede defeat when defeated and are quick to self-deprecate and crack a joke
on themselves. Hats off Porinju. Your recent confessions hold you in good
stead with small yet well informed investors like me.
Some relatively
bigger names in money management business who have destroyed a much larger
share of the savers wealth are finding ways to repackage some established
theories of legends such as Benjamin
Graham (BG) and Buffett (WB) to
avoid backlash and scrutiny. Some are repeating BG’s theories of quotational
losses and appearing in full page interviews.
The public
opinion is rife as to why the regulator of markets (SEBI) has introduced a
volley of measures to simplify the mutual fund industry by reclassification
of schemes and defining the size of companies on basis of market cap
of companies and % of funds invested in a category of companies.
What’s wrong in
it. Actually nothing.
Mutual funds and
fund managers had created an ocean of incomprehensible financial products where
schemes were being launched such as special situations,
arbitrage,
emerging
companies, vultures picks,
future
stars etc etc. Just the names of the new schemes were being used and
repackaged to amass fortunes (read expense ratios and bonuses).
Basically, all
of this is a demonstration of the fund manager's alleged belief and necessity at that point of
time to launch new schemes using publicly available information based on specious research.
And the market
regulator tried to streamline this so that the gullible investor, reposing
trust in the mutual fund – basically the fund manager, sees some method in
madness.
Indian markets
are most volatile for the following reasons. The size of speculation is 29
times the real market capitalization. For the record some of the most sound and
advanced and mature markets such as the USA, Germany and the UK have just 3-5
times the size of derivatives markets in comparison to the cash market.
So I am in
absolute awe of the regulator that all the recent froth in the market was
removed judiciously by introducing mechanisms such as ASM
and increasing the margin
money requirements in the F&O trades. And it surprises me that
investors are acting and reacting adversely because SEBI has introduced
measures that will allow overheated and irrational markets to cool off and that
will reduce the sheer gambling in the garb of investing.
I know of 2
middle class retired uncles who leave home every day with 10k of their pension
money, leverage and take positions worth 8-10 times, get wiped out with just a
5-7% volatility in the prices and come hope sheepishly only to restart the next
day to recover their losses. Derivatives are definitely weapons of financial
destruction as they have no underlying asset/value and are merely an arbitrage
between one person’s fear and another’s greed
I am shocked
when people ask me questions – do you play markets. PLAY? I ask – is it a
sport?
Statistically speaking, If you simply play an odd
even on a roulette in a casino you have a better chance of making
money than investing in the markets.
So, in this maze
of multiple schemes, thousands of options, there is just one reform that SEBI
needs to implement that could be a game changer in the interest of a common small
investor.
That reform
should be called the ‘Skin In The Game’
reform.
I have a
10-point recommendation for the entire MF and PMS industry where creative
marketing and false promises disclaimed by reams of fine print are called out.
- No advisor who gives advice on TV or print should be allowed to give a disclaimer.
- Irrespective of the size of the AUM, every fund should have a max cap of expense ratio not as a % of size but as a pure number. Why should a fund with AUM of 2 billion dollars or more charge over 3-3.5% in fees that amounts to close to 60 million dollars. After all incremental effort required to manage a larger or a much larger fund is just the salaries of a few more research analysts.
- Distribution fees offered by the fund houses should be reduced to less that 30-40 basis points and distributors mustn’t be offered perpetual commission on the funds brought in.
- All fund houses must be forced to have a similar fee structure for distribution and fund management fees (expense ratio) to disincentivise mis-selling.
- Why should an investor pay 3% for the first 7% ROI when Indian treasuries or Bank deposits are guaranteeing the same with zero risk. Fund houses and managers should get no or negligible fees and salaries respectively for generating returns up to the yields on Govt Bonds.
- The fund manager should swear under judicial oath that they and their close relatives as defined by the regulator for the purpose of gifting wealth would only invest in the fund managed by self and except for real estate and liquidity as desired by any individual, all investments in financial instruments will only be that fund that’s managed by the family member.
Yes, it’s a
tough proposal but then if a fund manager wants to earn hefty bonuses, he must figure this out and have a complete skin in the game.
- Fund managers only get a fractional % of their salaries if they return up to or less than the return offered by Govt treasuries.
- Infinite bonuses make fund managers take risks and positions that neither the gullible and ill-informed investor nor the regulator approves. Every fund manager must have a cap of a maximum performance bonus irrespective of a stellar return or a flash in the pan performance in any particular year.
- Is there any exit load on bank deposits? NO. Why should fund houses charge any exit load. An investor wont exit if the fund is performing and if the fund isn’t, and an investor wants to book losses and exit, why should the fund house be allowed to screw the investor twice over. Exit fees should be scrapped.
And lastly the law around this should
be so robust and penalties so humongous that no one can pull off a Houdini on
investors.
Rajat Gupta – the poster
boy of Indian diaspora was pulled up badly and almost destroyed by the US law
for one small mistake of his. The readers of this blog all know in their heart
of hearts that almost every promoter and every insider of a listed company in
India indulges and misuses the insider info for personal benefits. Would anyone
accept that ever anywhere else in developed economies? And would Indian law be
robust enough, ever, to instil the fear of God??
Only God
knows……...
manu also writes in The Huffington Post
