Last Updated on November 18, 2019 at 1:55 pm
Midcap and smallcap investors of L&T Mutual Fund are worried after the reported exit of Soumendra Nath Lahiri, the CIO of the fund house. Although fund manager changes are quite common, high profile exits such as these bring to fore one of the biggest risks of active mutual funds: an overdependence on individuals. A look at the options before investors and how they should handle this.
Lahiri’s record in the schemes managed is not uniform. He is best known for L&T Emerging Businesses, currently, a smallcap fund (manager since May 2014) and L&T Midcap (manager since June 2013). These have emerged as above-average performers in their categories.
The same cannot be said about other funds he has managed since Nov 2012, L&T Tax Advantage, L&T Equity and L&T Large and Midcap. The first two funds are not in the top ten over 3 and 5 years when compared with peers. L&T Large and Midcap has failed to beat BSE 200 over the last 7 years! Also considering how the midcap and smallcap indices have behaved since late 2013, it is simply impossible to attribute the success of the L&T Emerging Businesses and L&T Midcap to S N Lahiri alone. Most average and above-average fund managers should have done well in this period.
It is easy for an investor to form such perceptions based on which employee the fund house choose to feature prominently in the media. Investors will have to recognise that employees come and go and such exits are bound to happen.
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What are the options and what should investors do?
- If you are worried and think the funds will not be the same without Lahiri, act. Stop all investment and redeem existing units. Worrying without action is unproductive.
- If you (like this author) have never heard of Lahiri’s name before, continue until the performance is not good enough.
- What about waiting and watching? Investing elsewhere while retaining current units in the fund? These options can be stressful or lead to portfolio clutter, so caution is necessary.
For investors who attribute the fund’s success to a specific manager who has exited, any future downturn can be hard to handle. They could become overtly impatient or critical.
The trouble is, exiting is easy. Where to invest next is the problem. The manager of the new fund could exit after we start investing! If you wish to put an end to this, passive investing via index funds is the only viable solution. It will eliminate fund manager risk – both poor management and exits.
Passive Options are Limited
However, options for passive investing are limited. We do not yet know how many index funds and ETFs will behave during a liquidity crunch caused by crashes. We do not have many options in the mid and small cap space.
There is Motilal Oswal Nifty Midcap 150 Index Fund (Should you invest?) and Motilal Oswal Nifty Smallcap 250 Index Fund (Will this make a difference?) but these are too young. If there is not enough AUM growth, the funds could be wound up anytime. Which is why options are important. ICICI Prudential Midcap Select ETF is an option (with a small large cap allocation) but that too is largely untested.
One could argue that large, large plus mid cap and midcap portfolios can be created by combining Nifty Next 50 Index funds combined with Nifty Index funds and that these can be used as a proxy for midcap index funds. Quantitatively that is correct (based on past performance). However, behaviourally it would be a hard act to follow as many investors are spooked by the recent fall in Nifty Next 50.
It is important to recognise that there two active fund risks here. (1) The fund manager’s ability and how long they manage the fund (2) The investors connect with a specific fund manager, attributing even overall market movement (up/down) to them.
What is the practical solution?
Investors must recognise that in many cases it is hard to prove that a fund’s fortunes are governed by the entry or exit of a fund manager other than anecdotal evidence here and there. Even if they believe this to be true, it is not practical for investors to keep moving from fund to fund upon each fund manager changer.
Given that most investors do not exit clean and tend to keep old units “just in case”, they will end up owning the market eventually. Fund manager exit is common and beyond the control of the investor/AMC/regulator.
Therefore, there are only two practical solutions: (1) Become a passive investor. (2) If you prefer active funds, do not look at who is managing your active fund. Judge a fund only by performance. Buy, if the performance is consistent. Sell if it is no longer consistent.
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