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  • Rohit Musale, CFA

The Story of a High-Flying Fund Manager

Updated: Dec 23, 2022

Once upon a time, there was a fund manager.


He was very popular among his clients and online followers.


One day, he decided to write a book.


He asked his team to do some research.


The team went to work, crunched some numbers, and came back with loads of analysis.


The book was completed soon and launched.


It became an instant hit.


Thereby our fund manager began earning his third source of income, royalty income.


Why third?


Well, the first source of income was, the salary that he was receiving every month from his own company, for being a fund manager.


The second source of income was: the dividends that his own company would pay him, since he himself was a part owner in the fund management business.


The success of the book led to speaking engagements with, online and offline conferences, audio video podcasts, TV shows and more.


This paved the way for his fourth source of income: speaking income.


He would also get invites to host major investment conferences attend by the top business leaders, which added a fifth source of income to his life: hosting income.


Since a lot of money was entering his life at once, he had to put that money to some use.


He invested part of the money in real estate to start earning his sixth source of income: real estate rental income.


He hired a property manager to manage all his real estate holdings.


Part of the money was also invested in the same stocks that he held in his fund, just to give assurance to shareholders, that he putting his money where his mouth is.


However, there was no way to ascertain, what percent of his net-worth was going into these stocks.


It might as well have been less than 2% of his entire net-worth.


The dividends coming in from these stocks was his seventh source of income.


And not to mention, his eighth source of income: the dividends he was getting from owing some units of his own fund.


His ninth source of income came in the form of advisory income, for advising small business owners, on future business strategies.


And due to some excess cash, after accounting for his personal and family expenses, he also became an angel investor, thereby adding a tenth source of income.


Just to quickly recap, here were his ten sources of income:


1) Salary


2) Dividends from his own company


3) Royalty income


4) Speaking income


5) Hosting income


6) Real estate rental income


7) Dividends from personally owned stocks


8) Dividends from units of his own fund


9) Advisory income


10) Income as an investor in a private business


Notice carefully: 9 out of 10 of these sources of income were current income, meaning, the money was coming in the current year, not after 20 years.


Money coming in today is far more valuable than money coming in after 20 years.


On the other hand, all along the way, he was advising his clients or shareholders in his fund to remain invested in the fund for the next 10, 20, 30 years to expect a 20% compounded annual rate of return on their investment, an extremely low probability event, given the fact that only a handful of people in the world have been able to achieve that feat over a very long period of time.


Anyways, nothing was promised on paper of course.


However, a man who truly knew how to make money by generating multiple sources of income was asking people to wait for decades to really see a decent amount of wealth in their portfolio.


Why was he not discussing his other ways of making money with his clients or shareholders?


Once in a while, one of his many suspicious shareholders would ask him about the excessive valuations of the companies in his portfolio, sometimes even exceeding a P/E multiple of 100.


He would brush aside the question, by spitting out intelligent sounding jargons like 'free cash flow', 'distribution strength', 'honest promoters', 'ROE', 'ROCE' etc. The list would never end, until the questioner forgot the original question that he had asked in the first place.


Anyways, fast forward 20 years, a sad story evolved.


The economy was crashing, the country in which the fund was invested in, was in a war with a neighbouring country, fiscal deficit had increased a lot, inflation had gone up much more beyond expectations, as a result of which, the central bank was hiking interest rates almost every month, putting further strain on asset prices, especially stocks.


By this time, our high flying fund manager had already sold his business to some other high flying fund manager, who made the same promises that were made 20 years ago.


Our good old fund manager had retired and settled happily in his posh bungalow at a hill station, retaining almost 7 out of his 10 sources of income, if we exclude his salary and dividend income from the fund management business.


Whereas on the other hand, his good old clients were found sitting at their desk with a laptop, an excel sheet, a calculator and a cup of coffee, trying to figure out, if they really made 20% compounded annual rate of return on their money in the past 20 years.


To their surprise, they found that the real return was far lower, after accounting for all fund management fees they paid over the past 20 years.


Meanwhile what happened to our good old high flying fund manager.


He lived happily ever after, at the hill station.


A press reporter once asked him, "Why did your fund not deliver on its promise?"


He replied, "Well, currently the economy is in a bad shape. It will recover soon. Remain invested in the fund. Don't panic. The fund is in good hands now, with a very talented and a promising fund manager. Think long term. Don't get swayed away by market fluctuations. I see a great future ahead."


Regards,


Rohit Musale, CFA


21 December 2022

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