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JM Mutual Fund: Mid caps rock the boat
Personalfn.com | April 04, 2008 14:17 IST
Stock markets can be a rough place for amateur investors. With little or no experience, many lay investors burn their fingers badly in the stock markets never to return again. But stock markets have nothing against lay investors in particular; they are democratic and therefore treat experts and amateurs alike. How else can you explain star fund managers suffering the same fate as lay investors during a market fall?
When it suits them, fund houses promote a star fund manager to draw investors. The star fund manager's track record in identifying stocks/trends is publicised extensively. NFOs (new fund offers) are launched on the premise that the star fund manager will repeat his stellar performance and give investors a good enough reason to invest in the NFO.
One fund house that has played the star fund manager card to the hilt is JM Mutual Fund. Sandip Sabharwal (ex-Head Equities at SBI Mutual Fund) who earned his spurs in SBI Mutual Fund became something of a mid cap guru over there. So it's not surprising that other fund houses were just as happy to 'promote' his fund management expertise. The latest to use his name is JM Mutual Fund.
YTD Losers: JM Mutual Fund hogs the rankings
With Sandip Sabharwal's entry in the fund house, mid caps started appearing noticeably in many of JM Mutual Fund's equity funds. It was clear that the mid cap guru was weaving his magic.
When domestic markets tanked in the wake of the subprime crisis, mid caps were hit hardest. In a cascading effect, equity funds with higher allocations to mid caps fared just as adversely. Gone was the magic of the star fund managers.
Given its higher exposure to mid caps, equity funds from JM Mutual Fund were hit particularly hard during the market slide.Of the top 10 losers in 2008, three equity funds are from JM Mutual Fund (refer table) . Investors who believed that investing in equity funds from JM Mutual Fund was a smart decision suddenly started having second thoughts. In our view, these investors got two things wrong; mistakes that by now are very common in the Indian context.
a. Star fund managers are a short-term phenomenon
When the star fund manager quits, most investment teams find it difficult to replicate the spark that was provided by him. Of course, the fund house on its part will try to pacify concerned investors by asserting that it can sustain its performance without the star fund manager.
That is the harsh reality for fund houses; they first put the star fund manager on a pedestal so much so that investors associate the fund house with the star fund manager (ideally it should be the other way around). When the star fund manager quits, the fund house is on the defensive and is reduced to reminding investors that its investment processes take precedence over any star fund manager.
b. Mid caps are a double-edged sword
Our advice to investors is relatively straightforward -- invest with a fund house that relies on well-defined investment processes and not star fund managers. As pointed out, star fund managers can be a short-term phenomenon, while process-driven fund houses are relatively more permanent.
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