The future of PPFAS

Yesterday was a sad day for the financial sector in India with the passing of Mr.Parag Parikh. He was one of the famous value investors in India. His mutual fund, PPFAS is a pioneer of sorts. It has only one scheme, no dividend option and the owner, the manager and the employees themselves have stakes in it. 

Although its returns have not been extraordinary in the short period of time it has been active, its concept is in long term value investing and not going by the flavour of the season and hence, is difficult to criticise considering the concept.

Now, with both the leader, Mr.Parag Parikh and its fund manager Mr.Rajeev Thakkar having passed away in a car accident, what is the future of the mutual fund where a majority have invested in their faith of Mr.Parag Parikh's thinking, insights and knowledge? Is the concept institutionalised enough to carry on the legacy and thinking of its founder? Will it shut shop soon? Will new investors be willing to invest their moneys now? Investors would/should be anxious and be waiting to hear from the company on the steps ahead.

RIP Mr.Parag Parikh and Mr.Rajeev Thakkar.

Generating Alpha - Indian Mutual fund Industry

I am surprised that so many mutual funds know so much about the industry they work in and have enough good relationships with the companies' management to give them accurate information about their financing and profit numbers, not to mention where their industry is heading, what their competition is doing and what are the risks they are facing. The research reports I see are really good to read and understand too. But why is it that such informed fund managers not able to produce an alpha (Alpha is a risk-adjusted measure of the so-called active return on an investment. In short, the higher the Alpha, the better the fund managers stock picking skills). The Indian mutual fund industry has missed out on two good rallies one in 2009 and one this year. I see a systemic problem here. They never seem to know when the tide is coming and are constantly caught unawares. The current Indian mutual funds work mostly in a bottom-up approach (I am not refering to the top-down or bottom-up way with respect to sectors and the indian economy, but the bottom I am refering to is the Indian economy and sectors and stocks while the top refers to the global economy). Despite the fact and the characteristic of the Indian stock market that the majority of the investors's money comes from abroad, the mutual fund managers do not give enough importance to the money flow from abroad. They just believe in buying the right stocks and wait till the tide comes and the stocks rise. Though they the mutual funds talk about foreign money and majorly do secondary reasearch on international research reports, I dont think they are talking to foreign portfolio managers and FIIs who are putting and pulling money out of the Indian markets. If the fund managers understand the FIIs concerns and understanding and get the pulse of their investing mood/climate, they can buy stocks just before the tide is going to come and get out before the tide goes back, generating alpha for the investors.

Perking it up

Games mutual fund managers keep playing year after year:

Window dressing, Painting the tape and Comparison shopping.

More info about these games at:
http://online.wsj.com/article/SB122973369481523187.html

It is very interesting to note the following statistics:

Historically, 80% of all U.S. stock funds and 91% of small-company funds have beaten the market on the last trading day of the year -- and roughly two-thirds have given most of that gain right back on the first day of the following year.

A study by finance scholar Berk Sensoy shows that 31% of U.S. stock funds pick a benchmark that doesn't closely reflect what they own -- but does make it easier to beat "the market."