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Review: Optimix Multi Manager Equity Fund

Published on Tue, Apr 03, 2007 at 11:38 | Source : Moneycontrol.com

Updated at Tue, Apr 03, 2007 at 11:57

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Optimix Multi Manager Equity Fund is an equity fund where the fund management function will be largely outsourced. Normally a mutual fund scheme has a single fund manager. Though he may have a team working with him, ultimately the decision to invest rests with him as a single individual. However, in a 'Multi Manager' Fund, as the name suggests, the portfolio is constructed based on the inputs of multiple fund managers.

This is how it will work. Optimix will identify the best, top performing fund houses and portfolio managers and construct the portfolio of the scheme based on their inputs. Up to 50% to 60% of the portfolio of OMMEF will be constructed based on the recommendations of what Optimix calls the core managers. The balance will be done based on the advice of 'satellite managers'. Specialists will be chosen as per the investment type i.e. Large Cap, Mid cap or Small cap and even on investment style i.e. Growth, Value or Blended. That being said, Optimix will retain the discretion to decide on the allocation of any particular style or type of investment in the portfolio depending upon its evaluation and view of the market. (View - New Fund Offers open NOW)

Analysis

Optimix as a fund house started its operations as a specialist in Fund of Funds (FoF). A FoF is a scheme that invests in other mutual fund schemes as per its evaluation of the best on offer. It does not directly invest in equity.

A FoF is a good concept. It resolves the main dilemma of any investor --- amongst the plethora of options, in which mutual fund scheme do I invest in? Eventually, he takes a decision based on his limited understanding or upon the advice of an agent who may be more motivated by the commissions he earns than the investor's interest. Of course, not all intermediaries are guilty of this practice but deciding upon which advice is really unbiased and which is not is another problem altogether for the investor.

Sajjan S. Raut Desai, Fund Manager - Equities at OptiMix adds, "The limitations advisors face is not always commission related. It can be inadequate knowledge regarding the ever-changing and dynamic market."

So here was a readymade solution where Optimix as a fund house did the hard work for the investor through the mechanism of a FoF. One would have thought that the government would have encouraged this idea given the fact that it protects investor interest. However, this was not to be. A FoF is still being treated as a lesser child by denying it tax benefits that a normal equity scheme gets. And what are these?

Long-term capital gains are tax-free only upon sale of an equity-oriented mutual fund. Dividend is tax-free only for equity oriented mutual fund. Short-term capital gains are taxed at the beneficial 10% rate only for equity oriented mutual fund. And what is an equity oriented mutual fund? One which invests in equity shares. Now, a FoF technically doesn't invest in equity shares, it invests in other equity oriented mutual funds. Therefore, going strictly by the words of the law, tax benefits stand denied. However, in spirit, FoF investments are no different than the ones made by a normal equity oriented scheme. But so far, the government has been turning a blind eye to this blatant injustice. And an idea, which is not only good for investors but also for the health of the market, in general is dying a slow but sure death.

How is a Multi Manager different from an FoF?

Lets not digress. This discussion is not about the problems of a FoF per se, but about how Optimix has worked around this by adopting the Multi Manager Equity Fund approach. So in short, OMMEF will not invest in other mutual funds but instead take advice from them to create a portfolio of the scheme. Consequently, all the aforementioned tax benefits will be available. Also, this would be at no extra cost to the investor as the expense ratio will be similar to that applicable to normal equity oriented funds.

Possible limitations of the approach

(1) Possibility of a conflict of interest:

While the idea seems good on paper, there are some potential downsides. Fund management advice is coming essentially from other fund houses. I smell the possibility of a conflict of interest here. The reason is that at the end of the day, the customers of OMMEF and the advisor fund houses (whichever they are) are from the same pool. They are -- you and I - and eventually if OMMEF is performing better, then our monies would move to OMMEF rather than the advising fund houses. This is one area where Optimix will have to take care.

OptiMix Fund Manager Sajjan Desai clarifies, "Every Mutual Fund house uses their expertise to do justice to the investment objective of the scheme under consideration. However, incase of Multi Manager, they advise OptiMix, based on a very specific mandate provided by OptiMix. Therefore, the conflict of interest doesn't exist."

(2) Too many cooks syndrome:

The second area of concern is the "too many cooks syndrome". There is a reason why a ship has one master, a team has one captain and an army has one commander. The person at the helm is the one who provides the vision, guidance and leadership. When this comes from multiple diverse sources, it could lead to disorientation and chaos. Managing the managers may not prove to be an easy task as they may be left pointing to each other when accountability for performance or lack thereof arises.

Sajjan Desai clarifies, "The chief/commander in the case of Multi Manager is the Optimix Investment Team. That's why it's called 'Manager The Manager'. Since Multi Manager is an Active Investment process, OptiMix Investment Team keeps a very close watch on the advice provided by each Mutual Fund House and makes sure that the overall portfolio is in sync with the Investment Objective of the scheme under consideration."

The upside

That being said, the above weakness can well prove to be strength if harnessed and managed well. Just like many hands make less work, many minds should together be able to arrive at better and more informed decisions. OMMEF provides a whole other level of risk diversification for investors. A mutual fund is essentially a risk diversification tool as the investment is spread over a number of stocks. OMMEF will spread the investment over fund managers too. One may fail, the possibility of all failing is that much lesser.

Conclusion

OMMEF is the second such 'multi manager' offering from Optimix, the first being Optimix RetireInvest Fund Series 1 (ORIFS1). The latter scheme too, being launched only in December, its too early to tell whether this approach will work well or not. As mentioned above, it would depend upon the selection of the fund managers and how well Optimix is able to oversee them. However, at the end of the day, I feel the positives outweigh the negatives and investors looking to invest in a portfolio arrived at by the best minds in the industry with the associated tax benefits should take exposure. Issue closes on April 5.

- Sandeep Shanbhag

The writer is Director, A N Shanbhag NR Group, a tax and investment advisory firm. He may be contacted at sandeep.shanbhag@moneycontrol.com

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