Walking The Talk…..Easier said than done

Jayant Pai | jayant@ppfas.com

I was startled to hear two comments last week. These were made by the Chief Executive Officers (CEOs) of a mutual fund and a life insurance company, on two different business channels on the same day.

In the first instance, the CEO was being quizzed about an ongoing Public Sector Undertaking (PSU) Fund New Fund Offering (NFO) from his stable. On being asked about why an investor should choose his fund over other PSU Funds already available, he said that while fundamentally his fund was no different from the other PSU funds which had a longer track record, his was the only PSU fund which was currently available at Rs. 10 per unit and hence investors could get attracted to it. This contention is not only logically absurd but also akin to taking two steps backward. First of all, the nominal Net Asset Value (NAV) of a fund is immaterial. The NAV is only a figure which summarises the market value per unit after deduction of certain expenses. Hence an investor purchasing a mutual fund unit at Rs. 10 is no better a position than an investor purchasing another mutual fund unit at Rs. 20 on the same day. Both will rise and fall in tune with the market. The degree of this will, of course, depend on the stock selection ability and the cash calls taken by the individual fund managers. Hence it is wrong to sell a fund using this tack. Besides, for the past few years, various CEOs have taken pains to educate investors regarding the fallacy of the “Rs.10 NAV”. It is all the more distressing that the said CEO was resorting to actually propagating this fallacy while marketing his fund. Such acts could undo all the efforts made over the years.

The second comment was in respect of Unit Linked Pension Plans (ULPPs). Since September 1, 2010, certain IRDA regulations have made the product more investor friendly. However, paradoxically most insurance companies have ceased to offer this product since that date. On being quizzed as to the reason behind this, the CEO of one of the upcoming insurance companies (A tie-up between a Japanese company and two domestic PSU banks) openly said that this product was a “Money Spinner” earlier but had now ceased to be so. That is why they had discontinued it. While some may admire this CEO for being candid, I think that citing this reason is akin to committing “hara-kiri”. Also, while I believe that every company is free to decide on its product portfolio, pulling out products merely because they have become less profitable (not unprofitable, mind you) smacks of opportunism. Did investor/policy holder interest feature nowhere on the radar of this company (and others of its ilk)? These CEOs spout various platitudes at public fora. However, when it is time to walk the talk, they often fall short.

Let us hope that both these instances remain aberrations. Otherwise, the financial services industry will have a tough time bridging the “credibility deficit”.

9 Comments

  1. I heard something similar last week, but not from a CFO level person. This person, a friend of my father, wanted some tips on where to invest. Since he pressed me a lot, I advised him SIPs. But he was not willing to do it since it was boring etc. Then I told him Coal India IPO maybe good but his immediate answer was that was very expensive since it was Rs 700 (or some such number) and that some other company x was much cheaper since it was available at 50 Rs. He wanted to invest about 1L which is a reasonably significant amount for him. When I tried explaining to him that “cheapness” of a stock was not decided on how much is the share price, he was not willing to listen. It seems he saw some discussions on these TV channels by someone esteemed. Now I know from where people get such notions. I was appalled after my discussions with him and am more appalled by the CEO above.

  2. Wow, this is really amusing (besides being borderline criminal, IMHO)…didn’t know one could watch CNBC instead of the comedy channel!

  3. Nice one Jayant.

    I believe its a game for many people to be in the finance industry, who don’t know why they are a professional in the first place. Anyone will be very particular in admonishing a doctor, engineer, architect, or any other professional very easily for their mistakes than they would be willing to argue with a “financial expert” for his mistakes. A belief that other professions need to assume more social responsibility and finance doesn’t seems to be misplaced.

    Your blog just showcases that naivety of even the media, who don’t know “preferred stock from livestock” in the words of Gordon Gekko, to even allow such irresponsible comments in the public fora with no reprimand.

    I will be surprised if the CEO level speaker is not allowed to speak to the media again, and will be shocked if he is allowed to.

  4. Jayant, you should publish the name and organizations of these CEOs. Not sure why you can’t, since they already came on CNBC..

  5. Another similar one. Some stock market “expert” giving a tip on Big FM Radio in the morning. “Buy Shree Ashtavinayak Cine Vision Ltd. for today’s trade. In any case it is visarjan day today!”

  6. Thank you Raunak.

    I had alluded to the “Serial CEO Syndrome” in one of my earlier posts. This is one more manifestation of the same.

    Both, CEOs and companies are often blase about such faux pasas the tenure of the CEO is limited, and both the parties involved know that….

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