Grass or Oak – What characteristics does your equity fund have?

Nice article on Quantum Fund Blog.

It compares a fund to that of an oak and grass. In bad weather, both grass and oak survive. But strategies differ. Grass is more flexible and changes direction as per the wind. Oak remains rooted and does not change at all. The question is which is better? One which  adjusts as per the situation or the other that remains firm? The logic is extended to mutual funds as well:

In normal weather the mighty oak tree is a sight to behold, tall and strong and giving shade to all those that seek it. Similarly is there a more wonderful sight than seeing a grassy plain? With green as far as the eye can see, it is truly a calming sight.

Like all situations in life, it is in rough weather that the true characteristics of each are revealed. In windy conditions, the grass bends and twists as per the whims of the wind, whereas the mighty oak remains firm in the face of adversity. Both survive the storm, the tree as it remains firm and rooted while the grass survives because it bends as per the wind.

Similar situations also happen in the world of fund management where the winds of change blow daily in financial markets across the globe. There are typhoons that hit the financial markets too like the Lehman crisis in 2008. So does the equity fund that you have invested in remain firm during tough times? Or do the underlying stocks in the fund keep changing depending upon which direction the financial winds seem to blow?

This is a question that a very interesting article, in a widely read financial tabloid attempts to answer. The article which appeared on Monday 3rd Aug 2015 compares funds to the category average, and rightly questions whether the category average should be considered at all. It proceeds to describe that certain funds, which had high cash levels, are not necessarily bad funds in which to invest.

Our take on the article, which incidentally mentions Quantum funds, and this situation – is simple. Quantum follows the strategy of the oak, wherein we stay rooted to our investment philosophy of being value investors and continuing to follow a bottom up stock selection process. This could sometimes mean that we are swimming against the tide of most equity funds snapping up stocks when markets are at high levels. Quantum’s value based philosophy dictates that as long as we do not find value in a stock – that it doesn’t hit our ‘buy’ limit we will not buy that stock.

Similarly when markets are high, most stocks will hit their ‘sell’ limits, thus if we sell when markets are high and don’t buy more stocks simply because they are ‘in trend’ – we will be left with high cash levels.

Not sure which tabloid is being referred here.

Really interesting comparison. Things become suddenly so simple when one brings nature into financial discussion. We can keep discussing performance via betas, alphas and so on but all is forgotten. Things like these remain and are so true.

In economics thinking also one goes through these challenges. Should one stick to the ideas or discard them? Lord Keynes favoured grass approach and said one’s views changes  as times change. People have both burnt fingers or excelled by sticking to both grass and oak approaches. Not easy to decide really.

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