PMS investing: Ostrich effect hurting money managers’ performance

A mid-sized mutual fund was looking to fill the position of a chief investment officer for its equity assets. Like any other asset management firm, all it wanted was a seasoned fund manager who could drive its investment process keeping in mind the ever-changing and complex global macro-economic scenarios. But, it struggled to get the right candidate; the handful of experienced hands were already taken or beyond its reach, while the others, according to the fund CEO, lacked the capability to approach stock investing while keeping the bigger picture in mind.

As India gradually establishes its credentials as a global high-finance destination, there is a growing demand for local fund managers able to slice and dice the events overseas and incorporate them into the stock picking process. The fact, however, is that many money managers in India are not able to rise to the occasion.

The most glaring paucity of this skill is in the Portfolio Management Services or PMS industry — products for the rich because of their higher minimum investment requirements. The investment processes of many of them were found wanting after the recent bull run came to an abrupt halt early in 2018. Many of these fund managers went through the usual rigour of meeting companies and studying their financials, but very few analysed their stock picks while keeping macro-economy in mind. This strategy worked well in the almost uninterrupted bull run of four years with money supply in abundance and investors in high spirits. But, with complex global economic issues taking precedence, the chaos is palpable; at least their battered portfolios reflect that.

Until recently, it was fashionable for fund managers — especially the newly minted ones who are yet to see a full-blown bear market — to say, “I don’t track the broader markets. I am focused on the companies where I am invested.” For the more seasoned ones, such remarks were for effect. Others followed it slavishly as an investment philosophy partly because of the lack of understanding of global macro-economics and their impact. Some cheekily call it the ‘Ostrich Effect’, colloquially used to describe an insular behavioural pattern among investors. The myth is that ostriches tend bury their heads in the ground when they feel threatened. In the case of investing, an ostrich is someone who willfully ignores external events that can impact prices.

Practitioners of the art of investing agree that including the dynamics of the global economy in the investment process makes the process a lot more complicated. For many money managers, more external variables make investing burdensome. But, one cannot wish them away given that financial markets, in the last decade and more, have been largely driven by global factors, including economics and politics. It’s true one has no control of what the Fed would do next or whether oil prices would fall or rise, but excluding them from the investment process could encourage investors to take undue risks. A senior fund manager said an understanding of global factors tends to manage the risks of the share portfolios better. When an investor is cognizant of the potential risks, he avoids going overboard and follows a stricter investment process. This is critical for someone handling others’ money.

That said, it’s not easy for fund managers to gain insights into global events and understanding its implications on their shares. Textbooks help them with the basics but do little to further their knowledge in times of unconventional economic policies. Most domestic money managers — mainly the smaller ones — do not have access to cutting-edge research on global economics. Large global brokerages with the best minds prefer to share their insights with big mutual funds for obvious reasons. Investor conferences with influential speakers are usually expensive.

Portfolio managers will have to figure a way out to up their game. Increasingly, investing is not just about picking stocks but building a portfolio, keeping in mind the vagaries of the global economy.

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