Should You Mimic Star Fund Managers Stock Picks?

It seems very interesting to invest in stocks. But when it comes to selecting stocks, each one of us have our own methodology and research behind it. Some invest in stocks on the basis of the recommendation of their stock broker, while others invest on the tips provided by their friends or relatives having some insider information. There are even some who invest based on views of some analyst on news channel or likewise. 

Many people are aware that the mutual funds invest in stocks. These investments are based on sound research and are done by a fund manager who has been trained to take such decision. So, people now think that they should just buy the stocks these fund managers are buying and earn returns at par with them. This, in short, means mimicking the portfolio of a star fund manager who has proved his mettle earlier. But why would anyone want to do so? The fact is that people who think this way do not have expertise in researching stocks, they don’t have time to monitor their investments, there is lack of right attitude to handle market volatility, etc. This is the reason many people choose the easiest option, that is, to copy the best fund manager or other well-known investors like Rakesh Jhunjhunwala. These naïve investors buy what the fund manager buys in the hope to make a tonne of money. In financial parlance, this is known as ‘mirror investing’.

However, mirror investing approach may pose serious drawbacks even for a seasoned investor. 

Different Objectives
The main objective of a fund manager is to outperform the benchmark and generate alpha. Your objective might not be the same and it may be to meet your financial goals. These goals may be children's education or a vacation or to buy a dream car. Given the differences in the objectives, it is natural that the stock selection cannot be the same.

Exact Portfolio Copying Is Not Possible
It is not possible to exactly mimic the portfolio of a fund manager. A typical fund manager portfolio may consist of 30-50 stocks or even more as the corpus involved is huge. However, you have very limited corpus, so it will not be possible to buy all the stocks that a fund manager has bought. In that case, you would require to choose among these 30-50 stocks or among the number of stocks that a particular mutual fund is holding. Even if we assume that you manage to buy all the stocks of a mutual fund portfolio, the transaction cost will pile up due to this, which may eat up your returns.

Merely knowing the stocks that the fund manager is holding is not enough. You do not know the price at which the stocks have been bought by the fund manager and you also do not know how long the fund manager intends to hold the stocks. Moreover, you do not know the price at which the fund manager intends to exit a particular stock.

Your portfolio would be carrying a higher risk as your portfolio is a smaller version of the actual mutual fund portfolio and hence may be less diversified.

Liquidity Matters
The fund manager retains certain amount of the total corpus as cash to manage redemptions. But there is no such thing required on your part. As the mutual fund carries large corpus, fund managers are prepared to handle sudden redemptions of large amounts. On the other hand, due to the smaller corpus, your portfolio may get hampered if you need to withdraw large amount at short notice. So, the stocks which are good for them may not be good for you.

Other Differences
Apart from the above factors, there are other major differences, such as:
1.Depending on the requirements and opportunities, a fund manager can afford to take higher risk as rest of the portfolio is well-diversified. On the other hand, such a move with your portfolio may be risky.
2.Fund managers have access to a lot more information than you can have. They meet the management teams of the companies and try to judge the future plans of the companies, which is not possible in your case.
3.While investing, fund managers have some strategy in place wherein they provide weightages to the stocks they hold. You may be unaware of any such strategy. So you may end up over-exposed or under-exposed to a particular stock or sector.
4.Due to the time lag, your portfolio may pose great amount of risk. This is because fund managers have proper entry-exit strategy in place and you don’t know when they intend to enter a particular stock or exit a particular stock. And when you actually come to know, it may be too late for you to take the right action.
5.You may be having higher brokerage or transaction charges than that of a mutual fund, which will surely eat up your portfolio returns even further.

So, it is vital not to mimic or copy the portfolio of a fund manager. Doing so may pose higher risk to your portfolio. Rather than mimicking, it would be advisable to directly invest in mutual funds. This may reduce your overall investment risk and you would be indirectly investing in all the stocks which a particular mutual fund is holding in its portfolio.

To understand how easy or hard it is to mimic a fund manager portfolio, we conducted a research and tried to mimic HDFC Top 100 Fund for three years with access to information that an investor may have access to. It was very a lengthy and cumbersome process.

1.First of all, you must have access to all the data regarding the stocks that a mutual fund is holding.
2.Then you have to check the holdings every month to find how many shares were bought and sold by the fund manager. Along with that, you also have to check the proportion, as the number of shares bought or sold by the fund manager would be more than yours.
3.Then, you will have to buy or sell that stock. Remember, here you will not be able to buy or sell stocks for the price at which the mutual fund manager would have bought or sold.

So, even after maintaining the proportion and following the fund manager by mimicking him, we were able to generate very low rate of return as compared to what a mutual fund had generated over the same time horizon. So, it can be concluded that it is not a good idea to mimic the fund manager as it may harm your overall portfolio, even leading to loss of capital. Rather, it would be wise to invest in a mutual fund, rather than mimicking the same.