ARE STAR FUND MANAGERS A MYTH?

A recent exit of a star fund manager rekindles the old debate:to trust the fund managers or the pedigreed fund houses?

Just when we thought that it could be a good idea to follow fund managers instead of fund houses, on the back of the stupendous market rise that saw some fund managers outshine their peers, comes the news of star fund manager Sandip Sabharwal and JM Financial Mutual Fund (MF) parting ways. Although both denied the presence of any significant rift, markets are abuzz with rumours that JM Financial—the fund house’s sponsor—had serious differences with the star fund manager’s aggressive style and the severe underperformance of the fund’s equity schemes.

 THE GOOD TIMES...

When Sabharwal joined JM MF in November 2006, the fund house’s equity funds were in the dumps. But after his entry, things changed for the better. For instance, in 2007, out of 241 equity schemes, only four schemes gave more than 100 per cent returns; JM Basic Fund (JBF; 110.6 per cent returns), an infrastructure fund, was one of them. Two of its other schemes, JM Financial Services Sector Fund (a financial services sector fund) and JM Emerging Leaders Fund (JELF; a mid-cap fund) gave 94.5 per cent and 93.8 per cent returns, respectively. 

MF agents and investors poured in. Within a year, JBF crossed Rs 1,000 crore in assets under management (AUM), up from Rs 9 crore. By the end of 2007, the MF’s total AUM had reached Rs 12,613 crore, up from a mere Rs 3,851 crore during December 2006.

...CAME CRASHING DOWN

Trouble started in 2008 when Indian equity markets followed the global market crash. Any memories of phenomenal performance were soon erased when JM’s equity funds began to fall too. Though Sabharwal may not have been directly responsible for all the equity funds, the buck stopped at his desk as he headed the equities team. Five of the ten worst-performing equity funds in 2008 belonged to JM MF. JBF, JM Small & Mid Cap and JELF were the three worst performers of 2008 with returns of -75.6 per cent, -79.1 per cent and -80.3 per cent, respectively. 

Apart from his expertise of picking small-sized companies ahead of the market, Sabharwal also relished the freedom the MF gave. With the MF being a non-starter on equity side, the two were a perfect fit. Freedom came at a cost. When equity markets crashed by more than 50 per cent, small- and medium-sized companies were hit badly. 

Funds with highly concentrated portfolios and low cash levels, such as JM’s, were the worst hit. Even though the period of underperformance was just one year, its severity across the board caused heartburn at the MF. JM’s AUM saw a fall of Rs 6,756 crore, or 54 per cent, in 2008. Sources also add that two private equity funds have taken an 8 per cent stake and invested close to Rs 64 crore in the asset management company a month or so back and will also now have their representatives on the MF’s investment committee. Sources say the tighter control and monitoring may not have gone down well with Sabharwal. Both Sabharwal and JM MF declined to give specific reasons though both confirmed they have parted ways.

WHAT SHOULD YOU DO?

Our past recommendations of JM MF schemes were based on Sabharwal’s track record and the belief that he is going to stick around. Since that has changed, avoid fresh investments in JM MF’s equity funds. Here’s what you should do if you were invested in scheme’s from the fund that we had recommended—JBF investors should switch to DSP BR Tiger and JELF investors to Birla Sun Life Mid Cap Fund. 

This brings us back to the age-old question: should you opt for fund managers or MFs? While rising markets may bring the former into spotlight, just one year of market turmoil brings the focus back to well-pedigreed MFs that strike a balance between fund management freedom and systems and processes