Unconventional traits: Need of the hour for every fund manager

Authored by Rajnish Girdhar, CEO of Karma Capital

In financial services, specifically the investment world, Fund managers are considered a different breed, an elite one. And why not? They create money, literally. Most successful managers are followed like celebrities, their words are taken as gospel. 

In my experience, the best fund managers are also the humblest of the lot. ’Market humbles all’ -an often-repeated phrase in the world of equity investing still stands to be true with every test of time. Fund managers are among those who have been on a constant learning journey across multiple market cycles. They are constantly evolving while keeping their principal philosophies intact, which in our parlance, is called style. 

The most evolved asset allocators look at a fund manager through the prism of style and not Alpha over the benchmark. The style which we broadly classify as Value Growth Momentum of a Fund manager is like his signature. It may change slightly over years, and yet, in the longer run, it would look the same. It is the investing style of the manager which ensures their uniqueness in the crowd. The farther you are from the benchmark, the more differentiated is your approach when compared with other players. 

Understanding market psychology 

Following benchmarks is usually considered the most linear method of equity investing. It ranges from passive investing to Index hugging, eventually leading to cherry-picking high-weight stocks in Indices. This may work at times but cannot give differentiated and superior returns over long durations, blindly following the herd mentality can even sometimes lend an investor the necessary protection from market turbulences but it certainly does not make for a long-haul strategy. Good fund managers should be able to look beyond the indices and the consensus behaviour. 

If you are seeking above-average returns, your fund managers need to have foresight. In simple terms, you must depart from the consensus behaviour and move where others have not flocked to full value. 

Circle of competence 

This need not necessarily mean that one should buy something just to be different. Instead, fund managers should develop an understanding and sector-wise expertise to pick stocks with conviction. The stocks being part of the index are mostly discovered in terms of information and thus price. It's only farther from the market, that one can find undiscovered stories where the price has not been discovered because the information is either not available or is perceived differently. It's where hard work and one’s own due diligence are needed. It is fair to believe that no one fund manager can know everything. 

Hence, it becomes more crucial for the manager to work in his circle of competence dealing with only those ideas which are convincing enough compared to the rest.  

The right amount of diversification 

When such managers operate in a circle of competence, they spend an above-average amount of time finding undiscovered stocks and understanding their financials along with other indicators, thereby spending additional time in analysis. This naturally sets them apart from fund managers who follow benchmarks. 

There is just so much one can do despite being backed by a team, eventually leading to a portfolio which does not have a long tail. Due diligence plays a significant role here and when done successfully, ensures lesser chances of losing money in such stocks. 

Complex contrarian investing 

Intelligent contrarianism is another quality that unconventional fund managers possess. Markets move in a herd and invariably creates opportunity. When one evaluates one thread moving along the same direction but ends up finding value and investment ideas on the usually ignored side, we call it Contrarianism. It does not merely refer to doing the opposite of what the other investors are doing, which is selling when the markets rise and buying when they fall. It is a nuanced approach which requires one to see what the herd is doing, what is the reason behind it and whether there is any questionable factor with the herd’s movement. 

Investing into ideas which are not part of the consensus is what makes the investor stands out but it takes a lot of emotional effort backed with necessary study to invest in firms which are typically ignored, building conviction in such firms cannot be a half-hearted effort. The conviction in such cases cannot be borrowed but must be built grounds up and on a solid foundation.  

How long is the long term for holding investments? 

The idea of holding investments for the long term generally refers to a period longer than one year. In the context of building wealth, a holding period of 3-5 years can be considered a medium-term investment strategy. Factors that can influence the appropriate length of a long-term investment strategy include the investor's goals and objectives, and the nature of the investment itself.  

It is important to analyse an investment's potential and the investor's goals and objectives when deciding how long to hold it. Moreover, investors should regularly review their investments to ensure that they continue to align with their goals and objectives and adjust their holding period as necessary.  

In summation, market prices are determined by the collective consensus of all market participants based on a multitude of factors, including economic data, company earnings, news events, and investor sentiment, among others. This collective consensus can be highly unpredictable and subject to sudden shifts and changes, making it difficult to consistently identify whether an asset is overvalued or undervalued. Investing successfully requires knowledge, experience, and the ability to adapt to market changes. 

As market conditions and other relevant factors change, fund managers should regularly review and adjust their investment strategy as necessary. This is what sets apart fund managers with an unconventional approach who consistently outperforms across multiple market cycles.