Learning from John Bogle

Saurabh Mukherjea pays tribute (on valueresearch) to John Bogle who created the ETF revolution:

Bogle took the efficient-markets theory to heart and was amongst the first executives in the mutual fund industry to fully understand its profound implication, namely, it makes little or no sense to pay juicy fees to a fund manager to manage your money, given that the fund manager has little or no chance of consistently beating the market. Thus was born Bogle’s breakthrough idea – in 1975 Vanguard launched the world’s first index mutual fund. Instead of beating the index and charging high fees, the index fund would mimic the index performance over the long run, thus achieving higher returns with lower costs than the costs associated with actively managed funds.

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Franklin Templeton using nudging for e-voting: Green for Yes, Red for No

Interesting bit from Moneylife.

FT India had goofed up its 6 debt funds and asked unitholders to vote for future of the schemes.   However, it has used interesting nudging techniques to push voters to select the winding option:

The e-voting of unit-holders of six debt schemes of Franklin Templeton Mutual Fund (FTMF), which started on 26th December and would conclude on 29 December 2020, appears to be turned into a farce by FTMF, especially when the market regulator has been playing the role of a mute spectator. The Securities and Exchange Board of India (SEBI) has appointed TS Krishnamurthy, former chief election commissioner (CEC) as observer for the e-voting process and issued a statement on 26th December when the e-voting process had commenced. This move came a day after the Chennai Financial Markets and Accountability (CFMA) moved an urgent application before the Supreme Court (SC) against SEBI for not appointing an observer for the e-voting.

What is more startling is the design of the e-voting process, especially the use of green colour for ‘Yes’ and red colour for ‘No’ option with appropriate wording accompanying each. Next to the green ‘Yes’ button are words framed in an affirmative and comforting manner: “Means opting for an orderly winding-up of the scheme with a potential to realise fair value from the assets.” Next to the red ‘No’ button are words framed in a scare-mongering and negative manner: “Means opting for the Scheme to be re-opened, potentially leading to distress sale of assets and loss of value.”

This colouring and textual framing makes the entire e-voting process biased towards FTMF since we all have the perception of green signal and red signal embedded in our minds.

Everyone who sees a green signal at a traffic post will go ahead and would stop after seeing a red signal. Therefore, the use of this specific colour coding by FTML appears a deliberate attempt to influence the voting process.

Hmm..

SEBI capping Mutual Fund expenses

One wonders why financial services industry needs to be pushed by regulatory bodies to act in investor’s interests.

In the Board meeting y’day, SEBI knocked off a few percentage points from the expenses charged by Mutual Funds:

Reducing Indian Mutual fund categories from 36 to 4…

Dhirendra Kumar, India’s goto MF person says we need to lower the number of fund categories:

The biggest criticism of the new system is that from investors’ perspective, it does not really simplify the process of choosing a fund to invest in. There are 2,043 mutual funds in India, and counting all the plans, options and variants, there are possible 9,680 choices. This huge number starts to become manageable if there is some kind of a systematic classification that is applied to these funds. The system that SEBI has now put in place has 36 categories. Are 36 categories easier to begin with than 9,680 schemes? Certainly, they are. However, if you start with close to zero knowledge, which most fund investors do, then even 36 is too much. Let’s see how an investor can use the new SEBI system to achieve genuine simplification.

Here’s a recipe to slice through the thicket of funds and get to you investing goals: ignore almost all the categories. Practically speaking, if you are an individual investor whose financial goals are the normal ones that most people have, then you can easily ignore 32 of these 36. Here’s what remains; Multi-Cap for long-term savings, Aggressive Hybrid funds for medium term savings, ELSS funds for tax-savings combined with long-term savings, and short-term debt funds as a superior alternative for bank fixed deposits. That’s it.

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Here’s a recipe to slice through the thicket of funds and get to you investing goals: ignore almost all the categories. Practically speaking, if you are an individual investor whose financial goals are the normal ones that most people have, then you can easily ignore 32 of these 36. Here’s what remains; Multi-Cap for long-term savings, Aggressive Hybrid funds for medium term savings, ELSS funds for tax-savings combined with long-term savings, and short-term debt funds as a superior alternative for bank fixed deposits. That’s it.

It will be difficult to do this because SEBI’s set of 36 has many categories that have little purpose except to give the sales people complicated stories to tell. While there certainly are funds in many other categories that may have some justification, but if you want a simple to implement plan that also covers all bases and serves all normal investment goals, then you will get along fine. I know that sounds a little extreme, but it will make things extremely simple and still serve all your needs.

In finance, Simplifying things always works…

The churn in Indian Mutual Fund industry: DSP splits from Blackrock

Blackrock recently sold its 40% stake to DSP in their  DSP-Blackrock MF joint venture. Both wanted a 100% stake in the business and Blackrock is now in the fray for buying IDFC MF.

Dhirendra Kumar writes on this ongoing churn in MF industry and says there is nothing to worry. Infact all this could be great as it will shake up the industry:

SBI Exchange Traded Fund becomes country’s largest mutual fund scheme..

This is a fascinating development and comes sooner than expected. In a recent post, one argued that time for passive/exchange traded funds is about to come.

Now, one sees SBI ETF Nifty 50 overtake HDFC Equity to  become the largest equity fund. The fund though has not grown due to retail money but due to changes in EPFO rules which allows larger equity exposure.

How should we classify mutual funds?

Nice story on valuresearch.

They say amidst complexity of so many MFs, we need to classify for simplicity and clarity:

The first thing to understand about fund classification is that it is almost entirely about dividing the entire risk-return continuum into bands of roughly equal return and risk expectations. This makes the real task, that of identifying funds that are likely to generate higher returns at lower risk, easier.

At the broadest level, funds are classified according to the ratio of equity and debt investments in their portfolios. There are pure equity funds, debt funds and hybrids that have both. Their relative return vs risk levels are obvious. Within this first level of classification, the primary way of classifying equity funds is by the size of the companies they invest in. There are funds that focus mostly on large companies or medium-sized or small companies and there are those that keep their assets distributed among all these in some ratio. There are other axes along which equity funds can be classified, for example, which sector or industry they would invest in.

In the accompanying infographic, this classification is depicted as a tree. The root of the tree is all mutual funds. The first level of branches is the basic asset types. These are equity and debt (fixed income). There’s also an others category in which we have placed gold funds since it doesn’t fall in any of the other categories. Equity and fixed income funds are further sub-divided into smaller categories based on other characteristics.

And if you go by how fund companies describe their funds, you will end up with a large number of funds that appear to be unique or near-unique. You may feel there aren’t too many other funds like them. However, this apparent uniqueness is a marketing imperative. It is something that has been invented by fund companies in order to appear different and not have to be compared with too many other funds from other fund companies.

However, an investor’s interest is best served by keeping things simple. There are a few long-term investment needs that cannot be met by investing in a balance of funds that are mostly large-cap equity along with a little bit of mid-caps.

The best thing about having a good classification system for funds is to realise that making a choice is actually quite simple and a vast majority of funds can simply be ignored.

 

How Yale runs its endowment fund?

There are two things to  endowment fund run by US universities. One is their huge size which is more than size of GDP of several countries. Two, most of the business schools in these univs would be teaching the utility of passive or indexing fund management. So ideally all these funds should be just invested in some index fund as their own Profs would say. But the univ does the opposite by appointing an active fund manager to do the job!

Here is a profile of David Swensen, fund manager of Yale endowment fund.

Mr. Swensen’s route to the endowment world was circuitous, though. “My father and my grandfather were both chemistry professors,” he said. After earning a doctorate in economics from Yale in 1980, he considered teaching that subject. But while he was researching bond prices at Salomon Brothers for his Ph.D. dissertation, “they offered me a job,” he said.

Salomon was, of course, a Wall Street bond titan at the time and would eventually help define the go-go 1980s “Barbarians at the Gate” era of leveraged buyouts. All of that was still a few years in the future, though, and anyway, Mr. Swensen said, “I missed Yale so much that I went back to teach one class every semester.”

In 1985, the Yale provost, William C. Brainard, plucked him from Wall Street and asked him to take over the school’s $1 billion endowment.

His acceptance meant an 80 percent pay cut. But Mr. Swensen says he never regretted returning to work for an academic mission. “I am in the fortunate position of making very good money,” he said, for something he loves doing. He made $5.1 million in 2014, the latest numbers available.

From the beginning, he brought in analysts and interns to work on the portfolio. Part of that process soon included the weekly meeting to debate investment ideas. “Seeing that there was a debate, even at the most senior level, taught everyone to have their own view,” Mr. Golden said.

There is something about writing these profiles of a fund manager. They read so pristine and make the person appear as some god or something. They are so similar that they all appear too good to be true. All this lasts till the fund does well. As it makes losses all these adjectives turn into something else…

Look behind the scenes of the world’s biggest mutual fund

A nice story of the world’s biggest Mutual Fund – Vanguard’s Total Stock Market Index Fund – and its low profile fund manager – Gerry O’Reilly. He manages the $450 billion fund!

Indian Mutual Funds among cheapest globally…

These are the kind of news developments which are barely discussed in India’s financial media.

The shaping of Indian mutual funds has been a story which has few parallels in stories of India’s financial sector. All of this has been happening pretty silently as multiple actors along with the regulator have coordinated to make things more transparent and less costly for small investors. Our banks keep doing poorly despite layers of supervision but mutual fund industry just keeps moving along. I know there is scope for improvement which should be the case, but we have come a long long way from how mutual funds were bought and sold.

Apparently, the regulator wants to lower the expenses of managing these funds. The question is how costly are India’s mutual funds at the first place?

Sebi flags concern on brokers shutting shop..

This is an interesting piece of news. Given the noise on how Indian equity markets will reach new highs in future (the noise is not anything new BTW), one would imagine the equity players doing well. But one hardly sees this.

Look at most market players around – investment banks, mutual funds etc all seem to be bleeding and exiting. Most small players in these various sub-markets are shutting shop and in MF industry we have seen big MNC players exiting the space.

Broking industry is joining the exiting game as well:

What leads to profits in mutual fund industry?

James Kwak has a piece wondering why does mutual fund industry make large profits?

It is mainly because they continue to get high asset management charges. Why have people not ditched these active funds for index funds where charges are far lower?

Further nudging to simplify mutual funds in India

Dhirendra Kumar of Value Research has a nice bit of info on mutual funds. If things go as per plan, we should look at simpler mutual funds going ahead. SEBI has been nudging to make this industry simpler and transparent for a while now. This is another such step.

In the new scheme of things, SEBI proposes to ask all MF companies to restrict their mutual funds to just one or two across six categories:

Which were the multibaggers in last 10 years?

Multibaggers is a term popularized by Peter Lynch. It is meant for those stocks which give these great returns.

Aarati Krishnan of Business Line lists multibaggers of last 10 years. Surprising list of toppers:

Why foreign mutual funds keep being laggards in India?

In Indian finance industry, anything foreign is really important and carries enormous has weight. However, Indian public does not seem to buy the hype. Be it foreign banks or foreign mutual funds, most just fail to make an impact.

After huge hype over their entry, both Goldman and Nomura are exiting Mutual Fund space in India:

JP Morgan Fund does use side pockets idea..

This blog had pointed to a solution proposed by Prof JR Varma on its mutual fund mess. He had suggested that the fund should keep the bad asset away from its portfolio (in a side pocket). The fund could say business as usual based on the remaining value of the portfolio (which was about 95%).

The fund has decided to go ahead with this side pocket idea (not sure whether they read the idea). BS explains:

What makes HDFC Equity Mutual fund one of the oldest and successful funds?

It is always an interesting question. What makes an mutual fund equity fund scheme successful over a long run?

Based on efficient market theory, one should not really be seeing a active mutual fund beat markets over a long run. I mean some short term performance can be signalled to just luck which reverses soon as we see all the time. Over time one also expects markets to become more efficient leading to decline in performance of active funds. Even if we disregard efficiency theory, it is difficult to imagine anyone can really have the skills to beat markets consistently over a long run.

However, some mutual funds in India continue to perform and beat the benchmark by quite a margin. HDFC equity fund is one such fund:

Who makes a better Mutual Fund CEO in India?

Kayezad E. Adajania has a nice article in Mint asking this question.

Does a fund manager make a better CEO or someone from other management domains like marketing/sales etc.:

Why Indian mutual fund industry neglects North East India?

Chandan Kishore Kant of BS has a story.

The story is similar to limited banking in NE:

Next Jan Dhan Yojana to target Mutual Funds/Equity markets?

I was actually thinking that the Jan Dhan Yojana should have also linked to equity market. Just like the bank account under the scheme provides insurance and overdraft facility, it could have provided a demat or a mutual fund account as well. Given the huge surge in equity markets, it could have made some people wealthier (or atleast perceive themselves). The government could have pumped itself saying we have created so much wealth for the excluded poor.

Apparently, SEBI did think about the idea and actually asked MF industry to replicate the bank account scheme in MF space.