Fund managers at the country’s mutual funds, as also fund managers overseeing ULIPs, have a lot to answer for, given the majority of schemes have posted negative returns over the last year. While one year may be too short a period in which to evaluate a scheme’s performance, they don’t seem to have done very much better over a two-year horizon either. The classic defence, of course, will be that mutual funds have to be viewed over an even longer period, but near-term returns over one or two years also matter because some investors may need to cash out. The fact is that the Indian stock market has performed poorly over the past one year, and save for one or two brokerages, most others claimed we were in a bull market without pointing out that it was handful of stocks—IT firms, banks and a couple of NBFCs—that were driving up the indices. Indeed, the markets have had bad ‘breadth’ for about a year now, as FE has repeatedly pointed out, with more than 80% of stocks—that have a market capitalisation of `1,000 crore or more—in the red. More than a fourth of these stocks have lost more than 20% of their value in the last year.
While brokerages are loathe to concede that the markets are going nowhere because it would mean a loss of business, fund managers must behave more responsibly and caution investors. Unfortunately, they tend to not point out the negatives. For at least eight quarters now, estimates of corporate earnings have been downgraded, and this is not surprising because the macroeconomic fundamentals have been weak for three years and have gotten worse in recent months thanks to the sharp spike in the prices of crude oil. However, brokerages have been claiming, for three years at least, that investment levels are picking up and that the capex cycle has turned even though, every quarter, the CMIE data on project starts and the progress on implementation reminds us that things haven’t gotten any better. And that is despite the favourable base.
In their eagerness to grow their businesses and garner more assets, fund managers tend to project a rosy picture of the economy and corporate profits; they conveniently fail to point out the harsh realities of a weak banking system, rising interest rates and elevated commodity prices that are hurting users. The Indian markets have been trading a price-earnings multiple of 18 or more to one-year forward earnings estimates; while this is way above the long-term average of around 15, this is being justified on the grounds that India is the world’s fastest growing economy. The argument is ridiculous, and has been proven to be so because, not only has earnings growth been poor, the quality of earnings has been very poor too. Profits have been bumped up by exceptional gains, currency depreciation or favourable base effects. Indeed, the near-complete absence of pricing power, the excess capacity in the economy and the intense competition tend to be downplayed. With foreign portfolio investors (FPI) cashing out, stocks have crashed over the past fortnight, causing huge wealth destruction. More will follow if there are redemptions because selling stocks will not be easy at a time when there are fewer buyers. It is time the salaries of fund managers are linked entirely to performance.