A long-term client calls you in a panic because their Large-cap fund has trailed the Nifty 100 for three consecutive quarters. It is a moment every mutual fund distributor knows well, where the temptation is to simply compare numbers and suggest a switch. However, before recommending a change, you must look past the performance data to understand if the manager is merely suffering from bad luck or if their investment thesis has fundamentally broken down.
Evaluating the manager is not about picking winners based on past returns, but about verifying if the portfolio construction still reflects the strategy that attracted the investor in the first place.
Think of this process as a deep dive into the manager’s conviction, which often manifests through active share and sector deviations. For example, a manager who believes deeply in the recovery of the Indian banking sector might remain overweight on private banks even when the benchmark index is performing well due to gains in the IT sector. This leads to temporary underperformance, but it demonstrates the manager’s commitment to their research-backed strategy.
As an MFD, you need to check if the manager is taking active, informed bets or if they are simply hugging the benchmark while charging a higher expense ratio. The latter is a sign of lack of conviction, whereas the former is often the hallmark of an active manager navigating a shifting market cycle.
When reviewing an AMC’s disclosure documents or monthly fact sheets, look for consistency in the top ten holdings. If the manager frequently churns the portfolio or drifts from the mandate—such as a Mid-cap fund buying large-cap stocks during a market correction—it suggests a loss of direction. Your value as a distributor lies in your ability to explain this distinction to the client.
While direct plans offer lower costs, your ongoing guidance in distinguishing between a ‘durable conviction underperformance’ and a ‘structural failure’ is exactly why clients continue to rely on your professional judgment. A client who understands that their manager is sticking to a proven, disciplined process is far less likely to panic during a temporary dip.
Ultimately, a fund manager is a pilot navigating through economic weather, and every pilot occasionally hits turbulence. Your role is to determine if the pilot is still following the flight path or if they have lost their way. Always remember that a robust investment strategy rarely yields linear returns, and short-term underperformance is often the price an investor pays for the potential of long-term alpha.
Nuance
Check Your Understanding
An MFD is reviewing an Equity Diversified fund that has underperformed its benchmark for a year. The fund manager has maintained an overweight position in defensive sectors, even though the market rally has been driven by cyclical stocks. What is the most appropriate action for the MFD?
What does a high ‘active share’ typically indicate about a mutual fund’s investment strategy?
This is a companion read for Section 12.3 — Scheme Selection based on investment strategy of mutual funds from Ace the NISM Mutual Fund Distributors Exam by Akhilesh Gururani, available on Amazon Kindle.
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