Satyam, Unitech: How fund managers' greed let them down

The high flyers of the past who have gone on to become value destroyers usually had the backing of institutional fund managers, at least in the initial days of glory. The list is endless with the more prominent amongst them being Satyam Computers, Unitech, RCom, Suzlon, Educomp and SKS Microfinance.

All the stocks mentioned here have been multi-baggers in the past and have consequently lost more than 80 percent of their value. Needless to say many or all of these stocks were also prominent in the portfolios of mutual funds, portfolio management schemes, insurance companies and foreign institutional investors.

Investors who have trusted their money with institutional fund managers holding these stocks would have benefited in the early days of the bull run in these stocks but would also have lost out considerably if they did not exit the funds at the right time.

The question one needs to ask is why fund managers pick out such stocks as the ones mentioned above? The idea of entrusting money to fund managers is that they will pick out stocks that can create value over a long period of time and not zoom up and crash down.

Fund managers always tell investors to hold on for the long term, but they themselves invest in stocks which definitely do not create any value over a long period of time.

The answer to the question is many fund managers like promoter greed as it helps them outperform more solid and staid fund managers in the short term. The promoters of all the companies mentioned here have been victims of their own greed. Use of heavy leverage without any thought to the risks involved proved to be their downfall.

Satyam was an outright case of swindling of shareholders funds and not of leverage, but it was overlooked for many years by fund managers, as they preferred to look at its valuations, which were cheap relative to its better-managed counterparts such as TCS, Infosys and Wipro.

Looking at investments in such companies in hindsight will make investors cringe and wonder why any professional fund manager would have entrusted money to such promoters. The fund managers, along with the promoters of such companies, attain temporary glory, but when cracks begin to appear and the gold loses its sheen the true nature of such investments are revealed.

Unfortunately, as institutional investors rush to offload such stocks from their portfolios, the retail investor is left holding the baby. The retail investor gets sucked into the trap of past high-flying returns from these stocks and the heavy institutional presence in such stocks.

It is not difficult to spot good management from bad management. Bad management will always go out of the way to give insider information, which fund managers lap up. Bad management wants large institutional presence in their stocks so that they can dilute equity at higher prices. Bad management will always project unreasonable growth and will cook books to achieve near term growth projections.

Bad management is always worried about near-term stock price movements and not about long-term shareholder value. Any good fund manager can spot bad management from a mile, but that will not prevent them from investing in their stocks for short-term gains. Greed is all pervading and if you can ride someone’s greed in the near term why not invest? The other reason is he’s invested and he’s making money (he = fund manager in a competitor’s firm). The smart ones get off the bandwagon fast.

Fund managers investing in bad management for near term gains will not go away, but as investors you will have to choose whether you want to entrust your money to such fund managers.

Arjun Parthasarathy is the Editor of www.investorsareidiots.com , a web site for investors.