Without this fund, your portfolio is doomed
Issue #16
Fool here:
Sorry for the clickbaity title, still works doesn’t it? :)
I had quoted this in the previous post about costs.
Jason Zweig, when asked what he does for a living at a conference, answered”
“Between 50 and 100 times a year, I say the exact same thing in such a way that neither my editors nor my readers will notice I’m repeating myself.”
This is one of those posts where I repeat a very basic tenet of investing that has been utter a quadrillion times over and yet oft-ignored by investors.
This is another one of those posts where we talk about the same goddamn thing for three trillionth time! Before we go any further, fair warning, this post might just turn into some cliched bullshit about investing that has already been written 851 billion times. Try to bear with me. If you can't, I recommend hot yoga.
Dave Nadig is one of the foremost experts about all things ETFs and one of my favourite investing speakers and writers on the planet. He often keeps saying "investing is solved". It's an extremely bold claim, to say the least, but if you step back and think about it for a second, it makes a lot of sense.
What Dave means is not that there won't be any new discoveries in investing, of course not. What he means is that investors today have pretty much everything they need to achieve their goals. In the US, investors today can build a globally diversified portfolio for 0.05% or less; that's pretty much free. Even in India, where indexing is still in its warmup stage, let alone the first innings, you can build a well-diversified global portfolio for less than 0.4-0.5% and all signs point toward this only getting cheaper.
Dave points out the same thing and goes on to say:
Investing works, doesn't mean it's easy, just means it's largely solved. There are lots of solved problems that are not easy. And the reason I put that out there was because I think the more interesting challenge the real grand challenge is human beings and how we interact with money and how we plan for a lifetime.
Now just think about it for a second, and I am pretty sure you'll agree with this. Investors today have all the building blocks they need to build a really robust portfolio for all their goals. Of course, you can quibble with me at the margin that we need better debt funds, balanced funds, factor funds (smart beta), asset allocation products etc. But that's just trivial bullshit and in the grand scheme of things and it doesn't matter in my view.
The bigger challenge for investors is not picking funds that give you 1% of extra returns. But the bigger challenge like Dave alludes to in this episode, is how do we plan for a lifetime to fulfil our financial goals and retire comfortably so that our kids get the best education, or so that we are prepared to deal with any curveballs life throws at us. This involves figuring out ways to not let our impulsive decisions derail our financial goals resulting in us living in the streets with our wives and children in the tow. I know this sounds morose and dark, but isn't this what investing is all about? To live comfortably doing whatever you want without having to worry about money when the curtains start coming down on your career?
As I said earlier, what I am saying isn't new, and it is not some grand or profound insight. It is the same rudimentary thing that has been said a trillion times over.
But I don't think most investors have realized this aspect and I don't think they will either. It's utterly fascinating to me how we keep letting our monkey mind get in our own way. Please don't get me wrong. Just because I am writing this post doesn't mean I have some profound insight into investor behaviour and that I've achieved investing enlightenment. I am as stupid as the next retail investor, and I can write a 12 part series on all the dumbass things I've done when it comes to investing. Even as I write this, my portfolio needs to be fixing because of some really silly mistakes I've made. I don't mean for this to be some preachy, wishy-washy, I'm better then you bullshit sermon. This is just an honest opinion. We in the same leaky boat, unless you think
Enough with the bullshit man, get to the point already!
Right, sorry, control, control.
It's NFO season again. In the past couple month or so, since the markets recovered, AMCs are back to filing and launching funds nobody asked for and funds nobody will invest in unless somebody forcibly shoved them down an investors throat.
Like I was saying earlier, today you have all the funds you need to build a portfolio for any goal. AMCs are launching these funds because they need your money, not because you need their fund. It's hard to sell an existing fund when pretty much all the funds in India are benchmark + or - 2-3% (closet indexing). What do you do? You find some new shiny category which sounds fancy. The latest fancy fund category seems to be these multi-asset funds. These funds combine equity, debt, and commodities. While in theory, they sound nice, and I used to think so, up until recently, I think they are useless. All of these funds are equity and then some funds. They just sprinkle some 10-20% of debt and gold, which does very little.
Investors are not only taking the asset class risks but also the model risk that these AMCs use to overweight, underweight asset classes. And knowing our AMCs, it's not a risk worth risk-taking. The only single fund solution that makes sense to me is a static 60/40 balanced fund, but we don't have those in India. Instead, we have these stupid Dynamic Asset Allocation or Balanced Advantage Funds (mis-selling right in the title). These funds time equity allocations based on some model and are again largely equity plus funds. I don't see the point of taking the market risk along with AMC and their model risk.
Anyway, 9.99 out of 10 times, there is absolutely no reason to invest in an NFO. The last useful NFOs I can think of at the top of mind were the Motilal Nasdaq and S&P 500 funds. These funds filled a genuine gap.
Truth is duller than the marketing
There are 10 equity, 16 debt, 6 hybrid, 2 solution-oriented, and 2 other funds categories. Except for about 7-10 fund categories, pretty much all the other categories are designed to make money for AMCs. They are largely pointless for you and me.
Hands up, give me your money!
The reality of the asset management industry is that they make money when you do dumb things. If investors really just stuck with 2-3 funds and keep investing and did nothing, these AMCs would make a hell of a lot less money than they are making today. Because the reality is, the number of unique investors isn't really growing in India. While the folio count growth looks good, it's a seriously flawed metric.
So where will the money come from for the AMCs to make money? Yep, from suckers like you and me. They will dangle shiny new funds in from you to put money in them and switch around your investments. The result being they make money, and you end up hurting your financial goals.
What's good for you is bad for the AMCs
This is a contradiction at the heart of the mutual fund industry. AMCs claims they care about investors, and they ironically call themselves and are labelled as fiduciaries, but this is incorrect. Asset managers are like tobacco companies. They know cigarettes cause cancer, and yet they continue to sell them just by slapping some warning labels on the packages, which does nothing to stop people from smoking. By the logic of asset managers being labelled as fiduciaries, should tobacco companies be called humanitarians? Maybe we should give them a Nobel Peace Prize as well!
Asset management is fundamentally the same. Just by putting abstract risk labels on funds documents that mean nothing, they can continue selling sub-par products and call themselves fiduciaries and claim to care about investors. Let me give you an example. These 3 riskometers are from 2 debt fund categories. Can you guess?
The first 2 are UTI Credit Risk fund whose 1-year return is -32.69% and Kotak Credit Risk Fund. Two funds from the same category, but different risk labels. The 3rd one is Axis banking & PSU fund which has far lower credit risk than Kotak Credit Risk fund but yet, it still has the same risk, apparently! These labels are a joke and misleading at best.
The reality is that today's asset managers are the purest form of capitalist enterprises whose sole job is to maximize profits without bothering about the damage they cause. This was on brilliant display when the mutual fund industry did nothing while their salesmen and distributors who also call themselves as advisors sold dividend plans of balanced mutual funds as guaranteed income products. Shockingly, the mutual fund industry which claims to care about the investors did nothing to stop their salesman and distributors from selling these products to old people and retirees who didn't have the ability to analyse these products or access to low-cost advice.
Did you know AMCs pay RIAs who sell direct mutual funds indirect commissions to sell their products? Do you AMCs pay people to sell their ETFs, which don't have commissions at all? Do you know AMCs pay mutual fund platforms for favourable placement of their funds? Do you know AMC salespeople encourage their distributors to use deceptive and misleading information about funds from competitors to sell their funds? Do you know AMCs salespeople and distributors are stupid enough to highlight one day NAV movements to sell their funds?
These are your fiduciaries and people who care about you!
AMCs selling bad mutual funds and sub-par products and charging exorbitant fees is just like drug dealers selling cocaine and heroin and telling drug addicts to be careful and that they care about them. Am I harsh? Yes. Am I being polemical? Yes. Am I painting everyone with the same brush? Yes. Are there AMCs that are exceptions? Yes. AMCs like PPFAS, Quantum and a few others have stayed away from this asset gathering game. And then there are some good people in AMCs forced to play the same game because asset gathering, charging exorbitantly by hugging benchmarks is the only game in town. Even Vanguard, which is the closest to an NGO an AMC can ever be, seems to be losing its client focus. Vanguard is owned by its shareholders, and any profit it makes is passed back to its investors in the form of lower expense ratios.
Having said that, most AMCs are like supermarkets, they’ll offer everything whether it is right or not, just like Walmart sells guns in its stores. It’s your money and it’s up to you if you want to buy that gun and shoot yourself in the ass.
AMCs largely don't launch funds, because there is some unfulfilled gap for investors. When was the last time an AMC launched a really unique product that wasn't available? Here are the recent fund filings. Except for the G-Sec and low-vol ETF, all the other products already exist in some shape or form. It's the same bloody equity funds, and it's the same bloody debt funds. If you consider the Nifty 500 as the liquid investable universe today, there are more funds than listed relatively liquid companies in India. Look, I don’t have a problem with AMCs launching 200 funds, it drives me up the wall that they are labelled as fiduciaries and can with a straight face claim that they are doing right by the investors.
If there are good existing funds already and new funds are being launched, how are they suitable for the investors? New money is the lifeblood of asset managers, and as I said, it’s hard to make money by selling old funds, especially if they are underperforming. The solution is to launch shiny objects and seduce investors. 9.99 out of 10 times, NFOs are just so that an AMC can fill its shelves.
Investors aren’t exactly blameless here. Their misbehaviour contributes the AMCs misbehaviour and so continues the virtuous cycle of utter stupidity!
AMCs have been facing rising costs pressures with falling expense ratios, increasing compliance burden, and SEBI’s push for lower costs and direct plans. But doing things that are bad for the investors, in the long run, is just myopia. If AMCs don’t play their part in ensuring the longevity of investors, then they are the losers in the long run.
The other thing is that AMCs make less money if you just have 2-3 funds and keep investing and do nothing. It's in their best interest if you keep buying new useless funds and jump around from one fund to another from one AMC to another. The only people who make money from churn are distributors and AMCs.
Bros, ladies, you have enough problems in life. Don't make your portfolio one
Buffett uncle famously said, "investing is simple, but not easy". I don't know the context he said it in, but this quote has been bastardized to mean so many things. But whatever the context, I disagree with this quote. Investing is neither easy nor simple. It is nightmarishly hard; it's one of the hardest things you do in life.
Investing is all about the unknown. Think about it, you don't know the returns you'll get, you don't know if the markets will go sideways for a decade or worse yet more, you don't know what will do well and what won't, you have to deal with the barking gurus on CNBC, the bullshit garbage wisdom in newspapers, you don't know if you'll be able to achieve your financial goals, you don’t know anything.
You'll have to deal with all the fears and insecurities while constantly second-guessing yourself if you are doing enough to meet your goals while fighting off your biases to do stupid things and tinker with your portfolio.
When it is this hard, why the fuck do you want to make your life harder by chasing stupid fad funds? Are you crazy? Don't do dumb shit!
The lure
But, I admit it is hard to control yourself. It's hard to resist the seductive lure of a new hot fund, trust me, I know.
We, humans, are brilliant at rationalizing even the most stupidest of things. I know I am. When Mirae recently launched their PSU & Banking debt fund, I was tempted to invest in it to replace another debt fund I had in my portfolio. I almost replaced a small part of my portfolio with the Motilal multi-asset fund and the way I sold myself the idea was that there was a possibility that I could get slightly higher returns than debt with way lower volatility than equity. Last week when the ICICI Pru Low Vol ETF NFO was open, a day didn't go by when I was constantly wondering if I should replace an active fund I have in my portfolio with the ETF. I know, how hard it is, but just like drinking and smoking too much is bad, so are too many funds.
100 not out
I've seen a few things in my time in the markets. But I recently achieved nirvana when I came across an investor who had more than 100 unique mutual funds in his portfolio. I swear on the god of index funds, I am not lying. I spent an entire day trying to put myself in this dude's shoes. The sad part is that such investors aren't outliers, there are too many of these. Value Research has a portfolio manager on its site, and they did an analysis. The result:
However, when we started testing our new website on the portfolios of a sample of users, I had quite a shock. The median number of funds that a fund investor has invested in is 23. Fully one-fourth of fund investors have invested in 35 or more funds. This is so far away from what is sensible that our entire team was utterly flabbergasted. I'm confident that in no other aspect of fund investing have investors strayed so far from the right thing to do.
Of course, I'm not saying that this is the state of the larger population. Value Research Online attracts people who are more involved, and with more intensity, in fund investing than the general population. They also invest more. However, one would expect that they are also more knowledgeable and make better investing decisions. My guess is that it's the sellers who are to blame. They keep pitching new funds and many users keep falling for them.
How many funds do you need?
The answer is context-dependent and there is no single number. You can build a portfolio with just one balanced fund. You can build one build with 2 funds - Nifty 100 + a banking & PSU fund or a corporate bond fund (just an example, not a recommendation, don't do the stupid thing of thinking this is advice). You can have 3 funds - Nifty 50 + Nifty Next 50 + one debt fund. But in my view 99% of the times, anything more than 4-5 funds, your portfolio is probably in trouble.
I beg you
Investing is hard enough as it is. Please keep things as uncomplicated as possible. Automate as much as possible, if you are investing through a SIP as most of us do, just set it and forget it. Just log in when you have to rebalance or make some changes to your portfolio. There are other worthwhile things in life than messing up your portfolio. You can get drunk and watch Arnab Goswami. You can get high and read Think and Grow Rich and think and become rich.
Don't try to mess up your portfolio.
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