Its what inside that counts…..

Its not often that one is able to draw a parallel between ice-creams and investing but I got an opportunity to do so yesterday. I was watching a programme on Ben & Jerry’s, one of the well-known American ice-cream brands. Customers apparently love them for the unique flavours that they offer. Some of the popular ones like Chubby Hubby, Chunky Monkey and Dublin Landslide are intriguing to say the least.

During the programme, one of their personnel made a revealing observation. She said that the main reason why the brand was popular was the superior quality of milk used (due to the fact that their cows were hormone-free) and not due to the panoply of flavours offered. In fact vanilla was a flavour which was as much in demand as the exotic ones.

Are mutual fund investors not facing a similar situation today? There are funds with the most outlandish names imaginable, doing the rounds. How about “Flexi Cap Fund”, “Gen Next Fund” or “A.T.M. Fund”? (Names have been used for representational purposes only). In the past, catchy names have been used to generate the interest of investors. Advisors too found these to be useful marketing tools. It was more likely that an advisor who advised investing in something called “XYZ Core and Satellite Fund” would be more successful as compared to one who advised investing in something as dull as “XYZ Equity Fund”. In other words, there was a “Pull Factor” in glamourous sounding funds. However, it is instructive that when one ranks funds on the basis of their three year performance, it is the “Plain-Janes” who are at the forefront.

The reasons for this could be:

1. The fund managers in these schemes stuck to the basics of investing and adhered to their mandate more truly, ignoring the pulls and pressures of their marketing personnel. Also, many a time the newer funds were assigned to novice fund managers who were less stoic during times of turbulence.

2. The glamourous funds attracted a lot of hot money in the beginning, which was subsequently withdrawn, often at the behest of the same advisors who advised investing in them in the first place. Outsized redemptions play a key role in destabilising fund performance.

3. Many a time, the themes that the newer funds invested in were fleeting themes without any long-term differentiation potential.

This brings us back to the “milk quality” reason that Ben & Jerry’s have put forward. If the foundation is weak then the product itself will lose popularity, irrespective of the embellishments that the people in the marketing department may dream of. Investors must never forget this truism.

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