Which MF will outperform in the Future - A New Paradigm of Assessing this

Investors in Equity Mutual Funds are often confounded with the job of assessing which Asset Management Company is the best and will remain the best for the next 3-5 years.

The current methods of assessing this ARE OUTDATED.

Very often, the data given to investors is pertaining to past performance. 

While all agree that this is just indicative (no guarantee) of future performance the question remains - how can we really assess future winners?

No one has attempted an answer, at least not a convincing one.   Let me attempt one. 

An AMC whose management is able to create and sustain a vibrant internal culture of Mutual Trust & Respect (MT&R) will outshine. 

Let me use a formula to explain :

Any AMC, even the largest one, has limited energy.   There is no unlimited energy.  And this energy is allocated predictably. 

First, the energy is allocated to “Internal Marketing” and only the surplus is available for “External Marketing”.

Let me explain.

This AMC’s limited energy is needed to do all the activity that leads to satisfy the clients (“investors”) – Fund Management, market segmentation, fund distribution/channel strategy, etc.    In Adizes, we call it “External Marketing”.

But all this energy is not available.  There is a leak. Why?

Because “Internal Marketing” robs the AMC of some portion of the energy.   Each team has to “sell” its ideas to one another team – the Investment Managers, Marketing, Sales, Compliance, etc.   This is inevitable.  Teams have diversely opposite Roles & Interest and each team spends energy to “explain, convince and sell” its ideas to other teams.

When MT&R between the teams is LOW…. there is a lot of politics in the AMC…….a lot of energy gets consumed in “Internal Marketing” and such AMCs do not have energy to give to the client. 

When MT&R is HIGH, the energy needed for “Internal Marketing” is low.  A lot of energy is conserved.  This energy is very useful in serving the client better.

Let’s face it. Capabilities wise each AMC has almost equal level of talent, at least over a period of time.  So “capabilities” are not going to give them a competitive advantage.   Any other AMC can replicate it.

What cannot be replicated is a Culture of Mutual Trust & Respect.   And that can be the biggest and sustainable competitive advantage.   In the words of Dr. Ichak Adizes :

“What is the biggest asset a company can have?  It’s not what you have, but what you ARE.  What you have and what you do will change with time.  It will become obsolete even before you blink your eyes.  What you are is forever.  What is the biggest asset a company can have – it is a culture of Mutual Trust & Respect.    What is the role of Management?  It is build and nourish the culture of Mutual Trust & Respect.  That is you biggest asset and unfortunately it does not appear on the balance sheet, but it should.”  

It is very easy for a wealth manager to assess an AMC.  It is his role.  He must do it before recommending the products (especially Equity Schemes) of an AMC it to its investor clients.

For that he must focus on finding out what’s happening in the AMC?  Is there excessive politics, back-stabbing, rumors machine??  Or is there a proactive and dynamic system in place that helps the AMC’s teams to resolve (not bypass) conflicts and generate an atmosphere of Mutual Trust & Respect.

Wealth Management Firms and MF Distributors who can know each AMC from inside must use this knowledge to recommend or give “avoid this AMC” calls to investor clients. 

Just thinking.