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Is Quantum right here?

Deepak Shenoy2 min read
Quick Facts
What is "Is Quantum right here?" about?
What category is this article in?
General
Who wrote this article?
Deepak Shenoy, Capitalmind's research team.
When was this article published?
Published 15 August 2007.
How long does this article take to read?
2 min read

This one is a problem for you guys. Quantum AMC has an article in their July 07 newsletter saying thus:

Let’s take a normal school classroom.

During the mid-term exams, two students

Ram and Shyam scored 40% and 90%

respectively. It doesn’t take a genius to

figure out that Shyam (with 90%) is the

better performer. Now comes the fun part.

For the final exams, Ram scored 80% and

Shyam scored 95%. Who would you rank

as the better performer?

Shyam, of course! He scored 95 out of

a possible 100 while Ram scored only 80.

Yet, if Ram and Shyam were mutual

funds, and were ranked in the way mutual

funds are being evaluated, Ram (with 80%)

would have shown up as a great performer

while Shyam (with 95%) would have been

an underperformer and the laggard!

The logic behind the ranking of Mutual

Funds is that Ram, even though he has less

marks, has improved by 100% (from 40

to 80) while Shyam has improved only by

around 5.25% (from 90 to 95). By this

argument, the “best” mutual funds could

be those who have lost the most money

for their investors initially and not done

well, so that when they do recover lost

ground – as Ram did when his scores

jumped from 40% to 80% - they end up

as the “best performers”. That, dear

investor, is the potential flawed logic of

ranking mutual funds.

I think there is a serious flaw in this argument. I’ve mentioned in an earlier post about Quantum that I think this is completely ridiculous.

Firstly, mutual funds aren’t limited to 100%, are they?

Secondly, if the market moved up 35% in general, are we wrong to expect you to give us at least 35%? You are a no load, no commission fund, so the least I can expect is that you perform to the market’s expectations, no?

What they really intend is that investors should look at a “risk/return ratio”. There is something called the “sharpe ratio” which quantifies risk and return. Let me explain that in another post, but tell me if you also think the argument above is flawed, or if I’m just being silly.

P.S. I don’t want to sound too harsh on Quantum, but it gets my goat when they charge you 2.5%, give sub market returns, and have the gall to say other funds are expensive and that they shouldn’t be ranked.