The stock markets are rising, fund houses are having a field day with rising assets under management and new fund offer launches, and star fund managers are back in action. It's perceptible in the communication from fund houses.

As a research outfit, we regularly interact with fund houses and sadly, not all the information we receive is through formal communication channels.

Often fund houses choose to communicate off-the-record (we'll leave a discussion on that topic for another day), and a common refrain we hear is, "we are confident because we have Mr. Star as a fund manager now" or even worse, "why don't you recommend our schemes now that Mr. Star has joined our team of fund managers."

The message is clear; several fund houses are banking on the presence of a star fund manager to deliver a successful showing.

What makes a star fund manager?

So who qualifies as a star fund manager? Before answering that question, we need to understand how the investment process in a fund house works.

Typically, each fund house has an investment philosophy of its own. Based on the same, certain investment processes are put in place. These investment processes in turn govern the investment decisions.

For example, in case of an equity fund, they will play a part in deciding which stock should make it to the fund's portfolio and in what circumstances, the same stock should be liquidated from the portfolio or holdings in the stock need to be trimmed down.

A star fund manager is an individual who, based on his experience, can override the investment processes. The presence of a star fund manager would mean that his decisions take priority over what the investment processes may suggest. Simply put, the star fund manager calls the shots in all matters related to investments.

The star fund manager is no novice

Make no mistake; the star fund manager is not incompetent at his job. On the contrary, he is likely to be an expert, an ace who has a track record of delivering. The expression "star" conveys that the fund manager has enjoyed a certain degree of success and created a standing for himself, which is distinct from the fund house he represents.

Why investing with a star fund manager is undesirable

If the star fund manager is an expert, then why shouldn't investors associate with him? Simply because, the performance of funds managed by him solely depend on his presence. It is his presence i.e. his skill sets that are responsible for the performance.

And when the star fund manager decides to quit the present fund house in search of greener pastures (which is a common occurrence in the mutual fund industry), he takes the "performance" with him. As a matter of fact, we have witnessed instances when the star fund manager took his team members (including analysts and even dealers) from the existing fund house when he jumped ship.

The fund house, without the star fund manager, is incapable of delivering the performance that investors have come to expect of it.

In such a scenario, investors are faced with a rather unenviable option of following the star fund manager (and in the process liquidating their investments, perhaps bearing costs in the form of exit loads and then of course bearing an entry load when investing again) or staying invested with a fund house that is simply not equipped to deliver any more.

On the other hand, in a process-driven fund house, the performance is a result of well-laid out investment processes. The exit of any fund manager is unlikely to have a significant bearing on the performance of funds as he can be easily be replaced by another fund manager.

This is because the investment process has been institutionalised i.e. it is independent of any individual.

It should be noted that even in a process-driven fund house, the fund managers are no pushovers. Hence the popular conception that being with a process-driven fund house implies having monies managed by second-rung fund managers holds no water.

For example, Prashant Jain (HDFC [Get Quote] Mutual Fund) and K N Sivasubramanian (Franklin Templeton Mutual Fund) rank among the best fund managers in the industry; but more importantly, they are with fund houses where investment processes rule the roost.

What investors must do

Investors must ensure that they are invested with process-driven fund houses and steer clear of fund houses that bank on star fund managers. Admittedly, that's easier said than done. Here, the investment advisor/financial planner has an important role to play.

The onus of ensuring that the investor's interests are protected lies with the investment advisor/financial planner.

When your advisor recommends any mutual fund scheme, quiz him about the fund house and how its investment processes work.

If the advisor starts quoting the name of a fund manager and elucidating how he has a wonderful track record of delivering superlative performances and his experience in various fund houses, there's more than a fair chance that you are being recommended a scheme managed by a star fund manager. That should serve as a warning signal for you!

By Personalfn.com
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