Narrative vs. Data

Wednesday, January 30th, 2019

I came across this interesting post by Barry Ritholtz which talks about portfolio construction and how it has evolved in the US markets over the years.

To paraphrase; earlier portfolios were built based on narratives. Fund managers regularly used stories to identify good companies. For example: “The firm is gaining market share at the expense of the competition” or “The quality of the company’s management is top notch”.

These story-driven portfolios were then marketed via data: rankings of fund performance, ratings from companies like Morningstar and net return data.

I found this to be very amusing because it is how the Indian fund management operates TODAY. We also have funds that are constructed based on stories of quality of management or longevity of the business or based on themes such as infrastructure or consumption. It is very common for fund managers, in private, to talk up narratives of the companies they invest in. We also have numerous publications from ValueResearch and others that rank mutual funds and tell you, based on past performance, what you should buy this year.

Barry mentions how this style of investing would appear “quaint” to his younger readers. In the US today, portfolios are cheaply constructed using computer driven mathematics and are marketed with narratives such as indexing, factor based investing, ESG, smart beta etc.

For me the question isn’t about “if” this story will play out in the Indian financial markets, but more about “when”. There are a number of misaligned incentives the perpetuate the current system, but we are already seeing the start of change driven both the competition and by regulation. Today active fund managers in the large cap space already find it difficult to beat the index and we have already started seeing a number of fund houses launch smart beta ETFs. This story took about two or three decades to play out in the US. I would bet that things would change much faster here in India.

About the author

Rishad is the founder of Kairos Capital. He started his career with Standard Chartered Wealth Management and has extensive experience in markets, particularly in terms of mutual funds and stocks.

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