As the cash levels of funds in December 2009 bear out, more than 90% of fund managers failed to take a timely call on the market sentiment to protect investor returns

Since mid-November 2009, the market has struggled to continue the rally that started in March of that year. From the low of 15,331 it had sunk to on
3rd November (following fears of monetary tightening), the Sensex quickly rallied to over 17,000 on 16th November. Its next 500-point journey took two more months—it hit 17,554 on 15 January 2010. By that time, the Sensex was trading at a P/E of 20. Unable to sustain the dizzy valuations or the relentless rally, the Sensex collapsed by over 1,500 points by 29th January.

Did the fund managers become cautious after November? Many of them were certainly making cautious noises. But what did they do about it? This can be assessed from the cash levels of equity diversified funds at the end of December 2009.

Out of 204 equity diversified funds, only 18 funds had a cash level of over 10%. The remaining 186 funds maintained an average exposure of over 90% in equities in December. Possibly, fund managers expected the market to continue its uptrend. Interestingly, six funds had a negative cash balance, as they have invested in derivatives.

Among the lot, ICICI Prudential Dynamic Plan had the highest level of cash (21.70%) in its portfolio in December 2009. This Fund had 16.45% of its money in cash in November 2009. Escorts Growth Plan had 21.27% in cash in December 2009—up from 10.64% in November 2009. IDFC Enterprise Equity
Fund-Plan A had 21.64% of its money in cash in November 2009. By December 2009, it had put some of its money to work but still had 17.97% in cash.

Fund managers, except the savviest among them, do not take a call on the market. It is too tough for them. Indeed, who can predict how the market would move in the near future? However, when the market is clearly overvalued by historical parameters, wouldn’t it be sensible for fund managers to reduce their equity exposure to protect returns? But then, which fund manager has ever lost his job for not trying to protect returns? And this state will continue, unless the income of fund companies, and that of fund managers, is tied to the returns of investors.