Investors focus on Price, Fund Managers focus on Performance
As a financial advisor my key role is to meet investors and understand the behaviour during all the ups and downs in the market.
I have observed that majority of investors always talk on the stock price movement. They are filled with joy when the price goes up and get disturbed when it goes down.
As against this, A fund Manager always talks on performance. Performance comes with two major things: Management & Business model. Let me explain in more detail with example.
The HDFC Bank has reported annual profit growth of at least 20% CAGR every year since 1998 with least gross NPA 1% & net NPA of 0.30%. Hdfc bank has been successful in retaining its CASA ratio by 43% since last 18 years.
CASA ratio stands for current and savings account ratio. A higher CASA ratio indicates a lower cost of funds, because banks do not usually give any interests on current account deposits and the interest on saving accounts is usually very low 3-4%. Due to good management, good business model & consistent performance, HDFC Bank has been the darling of fund managers.
Indigo Airlines invested Rs. 34 crore, 9 years ago in the business and the best part is that the dividend income itself has been Rs. 3500 crore in this 9 years. Today this tiny investment of Rs. 34 crore is valued at Rs. 24,000 crore. Indigo is one of the rare successful stories of the Indian aviation sector. Today, it is the market leader with 38% market share. In spite of majority of airline companies making losses worldwide unique management of Indigo promoters has been able to make profits since 8 consecutive years.
Financial Technologies (India) Limited (FTIL) formed in 1988. Jignesh Shah is founder of the FT Group. Which went on to democratize and revolutionize commodity exchanges in India, Singapore, Dubai and Africa. The group offers technology IP (Intellectual Property) to create and trade on financial markets, across asset classes including equities, commodities, currencies and bonds among others. One of the recent and popular scam of NSEL where retail investors were lured by assuring 14% returns has turned to the night mare for the parent company financial technologies. The stock price fell from Rs. 850 to Rs. 70 after scam became public. This shows that a company with the best business model can collapse if the management is dishonest.
Mr. Vijay Mallya owned India’s biggest liquor company, a private jet, an Airbus and many other riches. Then in 2005, Vijay Mallya launched Kingfisher, an airline to match his style and flamboyance. But due to his bad management and bad business (Airline companies making losses worldwide) he is facing the case of loan default of over Rs. 9400 crore. The funds has been transferred from the books of KFA to his personal accounts.
I would advise every investor to understand the business model and the track record of the management before investing in direct equities. For those investors who can't spare time to study the company profile in detail, I would rather suggest them to handover the funds to the fund managers.