Blessed are those that have the size and scale . Markets around the world reward size. But in certain businesses size becomes winner’s curse . Fund Management is one such business where size can be a limiting factor .
It is a well known fact that the year 2008 and 2011 were the years that separated men from boys in this industry . But , it is not that well known that these were also years that saw many princes becoming toads . The performance results of many funds managed by top-notch private banks ( read princes) left much to be desired ( delivering under-performance).
Why is Smart Money , not that Smart!!! . The answer to this fascinating question can be equally revealing . One would expect the top-notch private banks and top-funds backed by army of Research Analysts , most extensive business contacts , powerful brands and of course unlimited resources , to out-smart passive index funds as well as resource-starved niche / boutique portfolio management firms (practising boring and mundane value investment model) with a sleight-of-a-hand . But the reality couldn’t be more different with many top-rung private banks / funds struggling to beat the passive index funds , leave alone the nimble niche portfolio managers.
Detailed internal study of the performance data for last four years of Top-5 Mutual Funds , PMS schemes from HSBC, Kotak , Motilal etc reinforces this view . Why does this happen . In the great majority of cases , this under-performance has nothing to do with lack of intellectual framework . It is more a product of (1) powerful invisible force which Warren Buffett famously termed as “Institutional Imperative “ whereby average is “safe” and the personal rewards for independent action are in no way commensurate with the general risk attached to such action (2) compelling need to look smart in the short-run (momentum driven approach) (3) dis-proportional focus on Macro and (4) large scale inhibiting personalized portfolio construction ( perils of scale ) .
Of course , there is other side to this coin . Niche portfolio firms , while have an advantage of not having to deal with institutional dynamics , it can have potential risk in the form of not having the right investment philosophy and sound research framework . For investors , if these risks can be assessed and validated , then the choice is easy . Then , the only challenge they need to overcome is the lure of size and brand !!!
Happy Value Investing !!!