Bertie was in awe of his batchmate Sid, who after the gruelling two years on the banks of Sabarmati, had the motivation to do another MBA from an Ivy League college. When they caught up recently, Bertie took a while to reconcile the Sid who drank copious amounts of happy water of dubious parentage with the Sid sitting in front of him who was rolling the ‘r’ when he asked for water. The r-roller Sid, unsurprisingly, works for a bulge-bracket investment bank where he advises bulge-bracket private equity firms on what to do with their bulging portfolios.
“In the thick of it, ha, your Ivy alma mater?” Bertie ribbed Sid, expecting a Hindi expletive in response. Instead, Sid nodded and said in a low tone, “The man is after us.” The ‘he who cannot be named’ was the Forty-Seventh President of the United States. Bertie now made peace with the fact that the rowdy Sid he knew and loved had been completely annexed by this investment banker.
“He wants us to pay him more taxes, and he won’t give us any funding.” Bertie had no idea why Sid was talking as if he were the spokesperson of his second MBA college, but decided to ignore it. “That’s how you balance the budget, no? Make a cost item into a revenue item.” Bertie was in no mood to stop the ribbing, but Sid wasn’t biting. “Tough times, man. And now he wants to stop foreign students from taking admission. How will we survive?” Bertie started seeing his friend as an endangered species whose face would soon feature on a “Save the Sid” ad.
Bertie banished that visual and, for the first time, asked a serious question.” But shouldn’t the big endowment fund help the university’s finances? It is meant for a rainy day, I suppose, and this is as rainy as it gets.” Sid’s face darkened at the question. “A lot of the endowment money is actually invested with my clients, the large private equity firms.” One thing Bertie is good at is reading between the lines. What Sid was telling him was that a large part of the endowment fund was illiquid. It was raining hard, but the umbrella, albeit huge, wasn’t opening.
Also read: Markets with Bertie: Is India’s glass half full or half empty? There is no clear answer yet
It was evident that Sid had taken this predicament to heart, and so Bertie decided not to press the issue further. Back in the office, as Bertie flipped through the pink paper, he saw a news piece about some of the said private equity portfolios being offloaded at steep discounts. He also read about private equity firms in the US borrowing large sums of money from commercial banks; a transaction that someone like Sid would be deeply involved in. A redemption call on an illiquid asset is fun to watch as long as you aren’t the redeemer or redeemee. Bertie has bookmarked the space for his viewing pleasure.
What the spreadsheets don’t tell you
One of the smartest financial decisions that Bertie has ever made, makes no sense on a spreadsheet. Years ago, he bought the house that he stays in without availing a mortgage loan. Financial planners will tell you how renting a house makes more sense than buying it, as the income from investing the cost of the house, even in a simple fixed deposit, far exceeds the rent that one would pay for it. Even when one is buying a house, taking a housing loan is advocated due to its tax advantages.
The analysis is logical, but what it does not factor in is the intangible benefits. In Bertie’s case, it was peace of mind; something that is hard to measure in basis points. Having a secure, liability-free place to come home to influenced Bertie’s asset allocation. After buying the house, he moved his portfolio much more into equity and even within that, his appetite for risk-taking increased exponentially. This reflects in his portfolio performance, but is hard to build into a spreadsheet analyzing the rent versus buy decision.
In the same vein, buying mutual funds under the direct scheme seems like a no-brainer. It saves the fee of using a mutual fund distributor and, therefore, enhances portfolio return. But when Bertie saw the results of a recent SIP investor behavior analysis by Association of Mutual Funds of India, he was reminded of the fact that spreadsheets are incapable of modelling the intangible.
The analysis showed that SIP investors, in general, are continuing with their monthly investments for much longer than they were five years ago. Importantly, when the money has been invested through a mutual fund distributor, the investors tend to stay for even longer, which, of course, is the right thing to do.
The value of someone trustworthy to talk to when market volatility is causing anxiety is hard to capture in basis points. When that person ensures that you stay the course on the right road of good investing, the portfolio impact can be huge, but cannot be estimated in the direct versus regular plan analysis. Despite being an astute investor himself, a significant part of Bertie’s mutual fund portfolio is invested via his childhood friend, who is a mutual fund distributor. That in Bertie’s case leads to another modelling problem – how do you value an evening reminiscing about the old times over a glass of single malt?
Bertie is a Mumbai-based fund manager whose compliance department wishes him to cough twice before speaking and then decide not to say it after all.
