William Gamble
Smart Fund Managers are not so smart after all

Money managers are supposed to be experts in managing money. But their performance in the US have been very average

Money managers either of hedge funds, mutual funds pension funds or sovereign wealth funds are some of the best-compensated individuals on earth. They are supposed to use their expert knowledge of markets, finance and economics to deliver outstanding returns to their clients, but do they? Are they worth the faith put in them by hard working people whose pensions they manage or the citizens whose funds they invest? Do they add value or additional returns over a random selection or investments? In short, are they worth the money? The sad truth is probably not.

Let us start with the stars of money managers: hedge funds and private equity. These financial geniuses and deal makers are paid literally billions to invest other people's money, but do they actually make money?

Hedge funds, when they were new, did make a lot of money. According to Chicago-based data provider Hedge Fund Research between 1990 and 2000 hedge funds were able to achieve an astonishing annual return of 18.74%. They did this by exploiting opportunities in markets. Of course the great thing about competitive markets is that success breeds competition subsequently driving down prices. Over the more recent past, between 2000 and 2007, hedge fund returns have been far more modest, just an 8.61%.

Normally an 8.61% return would be considered ample, but not with hedge funds. These celebrity hedge fund managers command large fees. The old standard in the industry, 2 and 20, (2 % of assets, and 20% of profits) required hefty returns just to break even. A return of 8.61% would be reduced by 3.7% in fees. So the real return would be less than 5%, a return that is often available on investments with little or no risk.

But there can be more fees. Hedge fund managers' methods and strategies are often arcane and filled with all the mystery that the name 'black box' implies. How can investors choose between them? Enter the Fund of Funds (FOFs). To be safe we are supposed to diversify our hedge fund bets in many different funds chosen by another group of highly paid money managers.

And what do investors get for these extra charges? Not much. This year regular hedge funds are down about 2%, and that does not include the 2% management fee! FOFs did even worse. They are off more than 6%! It is not surprising that the FOFs' share of hedge funds assets under management has fallen from 43% to 34%.  Worse, one of the justifications for fund of funds is that they have access to the best hedge funds. This might be a selling point except that one of the exclusive hedge funds that these managers chose was run by Bernard Madoff. The issue of Madoff is important for another reason, transparency. According to a study by New York University's Stern School of Business one in five hedge fund managers misrepresents their fund or its performance to investors. 

What about private equity? What do investors get for the risk of tying up their money for possibly years and the extra fees? Very little. According to a recently published survey only half of the investors in private equity deals are seeing returns above 10%. Two years ago only a fifth has such small returns. The number of successful investors with returns greater than 15% has fallen from 40% to 20%. But perhaps the biggest indictment of private equity has to do with the firm Kohlberg Kravis Roberts (KKR).

KKR is the legendary private equity firm. The subject of both books and even a film, it has been around since 1976. The firm is now going public. According to filings in 2007, the firm estimated its worth to be over $25 billion. It is now estimated to be worth only $6.4 billion a decline of 76%. The shares of the founders Henry Kravis and George Roberts have declined from $6 billion each to $800 million.

It is understandable that risky hedge funds and private equities might variable returns, but what about the plain old run of the mill mutual funds. Surely these are conservatively managed with consistent returns? Well no. In the past two decades actively managed mutual funds in the aggregate have failed to beat the indexes. So investing in index funds like an Exchange Traded Funds (ETFs) has proved to be more profitable than investing in a fund managed by an experienced, intelligent individual. Over the past 30 years fund managers have been underexposed in bull markets and overexposed in bear markets. Basically, they always end up chasing the markets and following the herd.

One would think that a human might be able to beat the averages, but that is really the problem. Managers don't beat the averages, because they are human. They fall prey to instincts and cognitive biases. In fact one of the most successful managers essentially did nothing at all. For the past 20 years he parked 80% of his money in money market funds. In other words, cash.

(The writer is president of Emerging Market Strategies and can be contacted at william@emergingmarketstrategies.com or w.gamble@alrroya.com).



Satish Amin

7 years ago

These bunch of jokers who call themselves FUND MANAGERS (there may be exception) are totally useless and are only trying to make money for themselves. It is difficult to understand why these FM's are paid such exhobirant salary/incentives. Frankly they are just playing with the poor investors money.. I think a law should be made to keep a check on these FM's and they should be held accountable for any kind of misdealings and underperformances. Since there is nothing like this these jokers are making the best use of it and just don't bother. I sincerly request MoneLIfe to take up the issue in a war footing with the concerned regulators/etc and ensure that there is transparancey in their perks/incentives and the life style they lead at the cost of the investors money.


7 years ago

Thanks for the way you have expressed the frustrations of millions of investors in mutual funds.like any other manager or an executive these people shd be made answerable instead of leaving them scot-free


7 years ago

The Fund Managers are sitting in AC being so highly paid from money of public /shareholders need not to put burden on their minds,that is why the MFs are loosing

Now, keep tabs on whether your employer is filing TDS returns

The tax authority is set to launch an online service through NSDL to enable employees to ensure that TDS deducted from salary is duly filed by employers.

Taking cognisance of the concerns of employees and doubts regarding filing of tax-deducted at source (TDS) by employers, the tax department is set to come out with a service that will enable employees to keep tabs on the filing of their TDS returns by the employer. This service, to be offered through the channel of the National Securities Depository Ltd, will be launched by the middle of this week, revealed an official from the Central Board of Direct Taxes (CBDT) on the occasion of a seminar organised by the Indian Merchants' Chamber on 'TDS - Recent Developments in Law and Procedures'.

Describing it as an effort to make the deductor accountable and the deductee aware, Shri S S N Moorthy, chairman of CBDT said, "We have created this system to empower the tax payers and keep the deductors on their toes. This will enable the deductee to check whether the returns for the TDS deducted from his salary have been duly filed with the income tax department by his employer."

Concerns have been raised of late regarding the compliance by companies towards filing and deposit of due taxes. Companies are required to deduct tax while making payments of salaries to employees. Although companies were deducting the same, it was suspected that some were withholding payments of the collected TDS returns to the income tax department.  This has forced the I-T department to consider measures to closely scrutinise returns filed by companies and check payment defaults in an effort to boost tax collections.

Entities required to deduct taxes while making payments will have to register themselves on the online service. Employees will then be able to access data with the NSDL regarding the filing of their TDS returns by the company.

In an effort to sensitise tax payers and other participants towards the complicated TDS procedures, the tax authority also plans to launch an online tutorial covering various aspects of TDS. This will also include answers to frequently asked questions (FAQs) regarding TDS provisions.

Mr Moorthy stated, "My primary concern is sensitisation of people who deal with TDS matters in various companies. Much of the confusion and complexities can be avoided if these people can be sensitised towards various provisions of TDS."

Sriram Singh, Chief Commissioner of Income Tax -IV, also stressed on the need to educate various participants in the tax system. "Unfortunately, what is the law is not practised and what is practised is not the law. There is a need to bridge the gap between the two."

P P Srivastava, Chief Commissioner of Income Tax, Mumbai, also agreed, highlighting the shortfall in TDS collections in Mumbai city last year. "Somehow, there is a mismatch at the implementation level. Some firms have not been paying in time. We need to act as facilitators to this process of TDS collections."

Kishor Karia, chairman of the Direct Taxation Committee, Indian Merchants' Chamber, stated that immediate clarifications on certain grey areas in TDS are needed and proposed that a forum be created for arriving at solutions for various procedural issues with regard to TDS.



Shantilal Hajeri

7 years ago

Recently I received a notice from the income tax department asking me to pay the difference of tax less paid y me along with interest.

In fact i was expecting a refund since the amount of TDS ws more than my tax liability.
Perhaps this has happened because, some of the tax deductors have not depsited the amount of tax deducted from with income tax department.
1) There are alreadystringent provisions in the income tax department. The department should implement them against the tax deductors who deduct the tax but do not deposit with tax department.

2) Once the assessee submits F 16, TDS amount shouwn in F 16 should be treated as tax paid by assessee even if the tax deductor has not deposited the same.

3) The onus of recovering the money from Tax deductor should be on Income tax Department. They have got enough statutory powers to do so.

4) Another common problem is the abnormal delay in issueing F16. For the year 2009-10, I have not yet received F 16 from many deductors.

5) Many people decut tax at source even for a paultry sum, there by increasing work load at every level. For example, the amount for Professional fees is 20,000 pa for deducting Tax at source. There are organisation who deduct TDS even for a sum of Rs.450/-pa.
I hope IT department will look into my suggestions.

Aditya Birla Retail to focus on reducing the number of private labels, increasing volumes from the existing ones

Private labels contribute 19%-20% Aditya Birla Retail’s total sales. It wants to reduce private labels to focus on volume sales

Aditya Birla Retail Ltd (ABRL) is betting differently on private labels, products that are sold by retailing companies under their own brand name. The company is now concentrating on increasing volume sales through special schemes in private labels rather than adding more products. It has reduced its private labels in fast moving consumer goods (FMCG) category to 290 from 350. In staples, private labels are more than 200. 

Sales from private labels are 19%-20% of the Aditya Birla retail's total sales. "We want to focus on individual categories and increase volumes rather than adding more products. We will be adding products as and when required in different categories," said Thomas Varghese, chief executive officer, Aditya Birla Retail Ltd. It is focussing on strengthening the food portfolio.

ABRL currently sells a range of private labels covering FMCG, apparels and footwear. Among its major in-house brands are More (staples), Blue Earth (apparels), True (footwear), Feasters (food based items), Kitchen's Promise (ready-to-eat) and Enriche (soaps and conditioners). Private labels in the stores are priced at 10%-15% less than branded labels.

The retail chain is also concentrating on increasing the customer base for its two-year old loyalty programme - 'Clubmore'. "We currently have a subscribed customer base of 1.3 million across India," said Mr Varghese.

The company plans to enter own branded consumer durables and electronics products when it has 14-16 operational hypermarkets. "By the end of this fiscal we shall have enough resources to introduce private labels in electronics. To begin with we will first introduce small appliances like irons, mixer grinders, beaters, etc. and then move to bigger white goods," said Mr Varghese.

Usually, private labels tend to be 5% to 20% cheaper than established brands. Retailers are able to cut out the distribution cost which they pass on to consumers.

Not only do private labels help retailers make more profits but these labels even help them to differentiate themselves from their rivals. And in the long run, they can use the private labels to additional attract customers.

Retailers are expanding their private label portfolio and targeting multiple consumer segments through tiered pricing and claims. Having established a significant presence in the household care segment, Indian retailers are now launching private labels in ready-to-eat foods, beverages and personal care. Retailers are building private label brands with product attributes that mirror national brands.

Adoption of private label by Indian consumers is not only based on price but also perceived quality. Success of private labels in the household category increases their propensity to try such prodcuts in the food and beverages and personal care categories.


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