5 reasons you should not clone a fund portfolio

By Morningstar |  10-02-15 | 

Duplicating a fund manager's portfolio may appear to be a smart way to invest in stocks. We tell you why it is not.

1) How will you decide which fund to clone?

Let’s start at the beginning. How will you make the selection on the fund to clone? If you start with performance, are you only going to view the last year’s topper? That will not be a smart move because the fund you select may find itself at the bottom of the heap next year. Do read 5 steps to decipher past performance.

Performance must never be viewed in isolation but always in context of the fund’s portfolio. The latter is the cumulative outcome of the fund manager’s strategy, outlook and the calls made. Does he follow a value strategy, a growth one, or a blend of both? Does he favour concentrated bets or a hugely diversified portfolio? Does he like churning his portfolio rapidly or is a buy-and-hold investor? Is his style more of a perennial bull-run winner or is he a bear market bellwether?

Let’s say you look at consistency of returns and narrow down on a particular fund. This brings us to the next point.

2) Your portfolio will not be diversified.

When diversifying your portfolio, you will have to take a call on the number of funds you want to invest in. The funds will be from various asset management companies, various categories (mid cap, large cap, flexi cap), various styles (growth, value) and maybe even mandate based (sector specific, thematic funds).  Should you decide to clone one single fund, you are sticking to one particular style from one fund house.

For instance, if you decide to clone a mid cap fund, your entire portfolio will be packed with predominantly smaller fare and maybe a complete growth tilt. That is not a wise move.

3) How will you select the stocks?

We shall move forward based on the assumption that you have narrowed down on a fund based on the fund manager’s strategy and historical returns. Which stocks would you replicate in your portfolio? If you choose to go with only the top 10 or 15 holdings, you could end up with a dangerously skewed portfolio. For instance, if the fund manager fears a downturn, he may be very tilted with just healthcare and other defensive stocks. His bets in infrastructure and power could corner a lower portion of the portfolio, but you will be avoiding them altogether. What if the fund manager’s call turns out to be wrong?

If you are thinking of mimicking the entire portfolio, that could translate into a personal stock portfolio of at least 50 stocks!

4)  How will you decide on the exact allocation to each stock?

Will you buy the stocks in exact proportion to the way they are held in the portfolio? If that be the case, you will have to check what he has bought and sold during the month and make the changes accordingly.  You are probably aware that fund houses are not expected to declare their portfolios on a real time basis, but once a month. By the time of the disclosure, you would have missed out on the exact price which the stock was purchased or offloaded.

All this churning will result in high brokerage costs and short-term capital gains, not to mention what a nuisance it will be when you have to file your returns. In addition, you will have to monitor the portfolio on a monthly basis and make the necessary changes. All this defeats the purpose of investing being made convenient via mutual funds.

5)  You may already be too late.

When you decide to piggyback on a fund manager’s portfolio, you have no idea as to the price he paid for a particular stock. He might have entered the stock when it was at a huge discount to its fair value and by holding on he is repeating the benefits. You may be buying it at a time when it is at a huge premium to its fair value. Not wise at all.

The fact that you are mimicking a fund manager’s portfolio goes to indicate that you are convinced these are well researched stocks. A better option would be to pay the 2-3% expense fee and avoid all the stress of constant monitoring and rapid churning, as well as the additional expenses with regards to brokerage and capital gains.

If you invest in a couple of funds with different investment mandates from various asset management companies, you would have a well diversified portfolio of your own.

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Aravind Sankeerth
Feb 10 2015 12:30 PM
True, agree with the title itself and then the reasons make it even clearer. Never clone, as no one but the manager knows why he is holding one particular holding in a particular %, it may be an arbitration option for ultra short term that gets reported too.!
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