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Last Updated : Aug 01, 2019 09:24 AM IST | Source:

Mimicking a fund manager’s portfolio is like chasing a rainbow

We would all be millionaires had the task been that easy. In reality, things could go horribly wrong by simply cloning fund managers.

Nikhil Walavalkar @nikhilmw

At the start of each month, financial dailies and websites come out with stories of what mutual fund managers or market wizards bought or sold. Many retail investors follow this flow of information keenly. Be that as it may, some get more adventurous and attempt to replicate fund managers’ portfolio themselves.  Cloning or mimicking a master investor is an accepted investment strategy by some. But it is not an easy as it sounds. We would all be millionaires had the task been that easy. In reality, things could go horribly wrong by simply cloning fund managers. Here are some reasons why it may not be wise to copy your fund manager’s holdings.

Mimicking the thought process not possible

Finding which stocks were bought by fund managers and which ones were shunned is not difficult, given the monthly portfolio disclosures. However, each fund manager has his/her own thought process behind taking a specific call on a stock. The scheme mandate and internal risk management framework of the fund house also influence the stock picking decisions, as does the weightage assigned to individual shares and sectors. All these factors are not apparent to lay investors who just go through transaction details reported by the stock exchanges, factsheets of fund houses and media reports.


Thus, each transaction carries an investment logic behind it. Sometimes the triggers in a specific company could play out in the near term and in others the expected growth may materialise only over many years. The holding period for each stock position may vary. For example, a fund manager may play an IPO (initial public offering) for listing gains, while another may look at it as a pick for the long term.

To manage your money is a full-time job for fund managers; they spend all their days just sifting through balance sheets, annual reports, meeting company managements, and their competitors to ascertain which stocks to buy and sell.

Just by spending a few minutes or hours going through fund portfolios doesn’t ensure that the necessary expertise is gained, nor does it translate to success in cloning.

Too many fund managers to follow

There are many fund managers. Whom do you follow? Should you go by a scheme’s one-year performance or is a ten-year period a better way to gauge the fund’s record. If you decide to go by the one-year record, there is no guarantee that the same fund manager will do well the next year. Even if you decide to follow one on the basis a long-term track record, there is not guarantee that the fund manager will be consistent throughout.

In the fund houses disclose their portfolios around the 10th of every month and the holdings are as of the end of the previous month. An equity scheme typically holds 30 to 80 stocks in its portfolio. If a fund manager manages three or four schemes, the number of stock tracked increases to 90-150. The same stock may be held in different proportions in different schemes. If you have decided to follow more than one fund manager, then there are some 200-plus stocks you will need to keep tabs on.

There are two choices you have – either invest in the same proportion as the fund manager or you choose from the fund manager’s picks.

Let’s consider both the options. There are couple of operational issues in the first choice here. First, you do not know the transactions the fund managers did through the month. You only get the end-of-the-month position. You also do not know the price at which the stock was bought. Exactly mimicking the portfolio is almost impossible.

If you opt to pick a stock from the shares that find favour with a fund manager, you are still getting into a difficult game. Among the stocks bought by the fund manager, if the share you decide to buy does not move, then you are left with an underperformer. If the stock you decide not to buy ends up as a multi-bagger, you get a heartburn!

Then there are issues such as holding period, risk appetite, the ability to average down costs by getting the timing right, and the ticket size. If there is a mismatch, you are likely to end up with losses.

The tax angle

A mutual fund manager does not pay taxes upon sale of shares. But when you do it on your own, you are supposed to pay taxes wherever applicable. This will definitely eat into your returns and you will underperform the fund manager you are tracking.

Thus, it is not a good idea to blindly replicate the portfolios mutual fund managers or other stock experts. Invest directly in equity shares of companies only if you have the time and wherewithal to analyse the company’s financial statements and understand the business. However, the better and easier option is to allow your mutual fund to manage your money.

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First Published on Aug 1, 2019 09:24 am
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