Last time around, we looked at Multicap Funds at a macro level. This week, we deep dive into two Multicap funds. Why only two? Well, for one, I like this space and also wrote about these two funds in past. A post on Motilal Multicap 35 Fund here and a little snippet on PPFAS Long Term Equity Fund here.
Second, this tweet by Radhika Gupta, CEO of Edelweiss AMC, also caught my attention:
Basically, she also says very similar to what I wrote last time – smaller AMCs are innovative, nimble and also seem to perform better albeit with smaller budgets. You can read the full tweet thread here:
So, let us look at these two funds in detail. They have many similarities:
We will look at Quantitative and Qualitative parameters for both the funds. Let us start with Quantitative Parameters:
For a moment think about the promotional material from Mutual Funds. There are 40 Mutual Funds in the country and according to them, their funds are in the top. How is it possible that every fund house claims they are the top performers? The answer to that is narrative bias. They present data in a way that highlights the positives and/or conceal/not disclose the negatives. To overcome that, we will consider an often-overlooked metric – Drawdown. Drawdown is how much the investment has fallen from the previous peak/high. It does not consider the gains. It only considers the fall. This metric is especially useful when looking at long term performance. Second, everything being equal, lower drawdown means, easier for the fund to bounce back when the tide turns. Let us look at drawdown of these two funds:
PPFAS seems to be falling less than Motilal in 2015-15, in 2018 and even in current phase.
Naturally, the logical question an investor would ask: I understand drawdown now but what returns did I get? Very well, let us look at that too. We will see their Alpha. Alpha is the excess return over the benchmark. If a fund generates better than benchmark returns, it is positive alpha and vice versa.
The first data point is from Apr’14 to Dec’14. Last data point is year to date – Jan’20 to May’20. During the first 4 years Motilal clearly outperformed the benchmark and PPFAS. During last 3 years, PPFAS seems to be outperforming the benchmark and Motilal. Both funds had their place in the sun. This shuffle in leaderboard could be attributed to multiple factors – change in economic cycle, change of fund manager, their investing style etc. Fund selection based on past returns is pointless. As MF themselves say, past performance is no guarantee of future performance. Let us look at some more parameters.
One AMC just preaches “Buy Right and Sit Tight” and does the exact opposite in the portfolio (see my earlier note). The other practices it without preaching. Looking at portfolio of the two funds, Motilal 35 has had more than 55 securities over its 6 year’s history. It had tried all sorts of things in the fund. From Value investing to Growth. Momentum to IPO. And everything in between. Whereas PPFAS had just 25 securities in its 7 years of existence. It just keeps buying more of those 25-odd, well researched, high conviction bets rather than spreading thin or doing things out of the fund mandate. To me, it shows conviction in own research and the stomach to sit through it during lean phase.
Second, PPFAS has had skin in the game from the very beginning. The fund managers and employees own little more than 4% of the fund. What does it mean? Simply put, the fund manager’s and unitholder’s interests are aligned. Though I have heard the same for Motilal 35, I could not find any data. If readers have something in this regard, please do share.
Third is Focus. PPFAS has had only 1 fund for a very long time. All their energies are devoted to this. This unequivocal focus is shown in performance sooner or later. They now have 3 funds. Motilal AMC has 20 funds now and they launched 8 funds in last year alone. Nothing wrong with it as long as fund managers and the support teams are able to allocate the required time and energy to all their products.
Fourth, and perhaps the most important – management quality. If management quality is very important parameter while investing in a company, then why can’t the same logic be used while investing in a Mutual Fund? The difficult thing while evaluating management quality is – there is no defined metric. Each investor might have his/her own yardstick and it is fluid. One measure that I often use is – how did the company handle crisis in past? Luckily both funds had their fair share of it. For PPFAS, it was Noida Toll Bridge in 2016. The company where they had a decent percentage of investment was in trouble overnight due to a court ruling. PPFAS devalued the valuation below the traded price, exited and stock when the lower circuits cleared and made provisions in their investment process – not to invest in companies where government intervention is possible. For Motilal it was Manpasand Beverages in 2018. Here too, due to unexpected news of auditor resigning and fraud at the company sent stock price in down circuits. However, in this case, AMC was in denial mode for a very long time. It exited the stock fully after good 16 months of the event and by then it had become a penny stock.
The monetary loss in each instance was just few percentage points of the AUM but the process of managing the crisis were very different. The crucial thing to note is that the crisis and its response are situational. Hypothetically, if either management were to face a similar situation again, they might manage it differently – what they seem fit at that time. Even the interpretation by the outside world will be different by different set of people. This individualistic interpretation and response is what makes us unique. As an RIA, I am not associated with any producer. I don’t get any benefit, financial or otherwise, for recommending or not recommending a product/service. This allows me to present an un-biased view. This is my opinion. You can certainly can have yours.
Applying some of the principles of investing while selecting a Mutual Fund – following process is more important than the outcome. End result is not in our control. What we do today (the process) is in our control. Selecting a good management is far more important than growth. A management who will not short-change the small guy. Management who has skin in the game. Contrarian not because it is fashionable to be. But because the business environment demands that. And most important – circle of competence. Not doing multiple things at once. But doing that only one thing better than the next guy. And perhaps then, expanding that circle.
What is this fund doing differently that led to performance, AUM growth, better risk management and gaining investor trust without much promotional/marketing expense? I am reminded of this poem by Robert Frost:
Two roads diverged in a wood, and I….
I took the one less travelled by,
And that has made all the difference.