Recently there has been a lot of hullabaloo of how one particular fund has delivered around 40 times returns in 14 years. The best thing about statistics is that they show us what the statistician wants to display so if a fund has done best in the last five years it will advertise that period. The idea is to cut the time charts according to convenience and display it as an advertising tool.

The biggest question is whether these pieces of data are as Taleb would call rare random chance events or do they bear any resemblance of a recurring nature?

While I like history the worst place to put history is in the asset management industry.
 
At the cost of sounding critical I have stopped looking at how the past data works because investors cannot make future returns by looking at the past. More-over the past data means almost nothing when you have had several fund manager changes and in some cases even the whole research team has been revamped.

My first question would be to find out if  there is any data of how many of the original investors are still with the fund? If there are a few people invested then the fund should use their faces to advertise. That will create more mileage for the fund in terms of impressing new investors then anything else. Here we should exclude the investors who are betting with less then 2% of their net worth.

There are over several hundred Mutual Fund schemes (and each of the fund houses having around twenty to fifty of them) then obviously a few would do the double of the underlying index but the trick is to find that out in foresight then in hindsight and the only way to know if that was in anyone's foresight is to count the number of original investors in the fund.

Though I have no privy to such data I am sure that the actual numbers would not impress me or for that matter anyone who is convinced and aware of the danger of getting sucked into chance events thinking them to be actual predictable outcomes in foresight.

I'd also like to know the Fund manager's bet on this particular fund as a percentage of his net worth soon as he took over and how long has he continued with that bet. Of course there should be no one believing more in the Fund then the Fund Manager himself. Now if the Fund Manager's bets aren't too big then he also did not think of the performance in foresight thus making it a chance event.

I would strongly urge SEBI to make mandatory disclosure of the Fund Manager’s investment in the fund so that Investors know if they believe in the fund more then the Manager. Even if absolute bets are not mandated SEBI should include classifications as a relative percentage of the Fund Manager’s net worth. 

There is a need for some urgent legislation in this context so Fund Managers just can't come up to the Idiot Box and say "OK Guys we got it wrong". They should also be made to pay for their mistakes. Once this is done some funds will advertise their Manager's bets in the underlying fund. Clearly Funds with little bets of their managers will have little confidence amongst the investing public and vice-versa.


basant2010-05-04 05:34:37