Why are portfolio Managers like Zebras?

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Ralph Wangner’s learning is a unique blend of psychology and financials. He compared fund Managers to Zebras. He found no difference between the animal and the man. Here is how he expressed his views

Category

Similarity traits

Profits

Both zebras and the Institutional Managers run after profits

Risks

Both hate to take risks

Movement

Both prefer moving in herds. In all the large cap funds the top 60^ of the portfolio is very similar.

The  theory went further and Wangner argued that Fund Managers like Zebras are of two types, the aggressive and the defensive. The aggressive zebra stands outside the herd. Here the grass is fresh and green but the risk of being pounced upon by the lion is also the highest. Similarly the defensive zebra stands in the inner ring. Here the grass is trampled and rarely fresh During an attack the Lion takes the zebras on the outer ring thus leaving the half fed inner ring zebra to fight another day. 

Compare the grass to the returns that fund managers make. The outer ring fund manager refer to our friends like Samir Arora  who would have bought an Infosys and a Satyam in 1997 while the inner ring refers to managers who would have preferred buying Reliance and ITC during those times 

The stock analogy can be extended further. Let us analyze a situation where a fund manager’s top five holdings are Reliance, Infosys Technologies, Bharti Airtel and HLL and ITC as his top 5 holdings and all of them go down with the market. In this case his investors would complaint about the companies or the markets or the US economy (because of which Infosys had to reduce its guidance) or the govt. for imposing regulations on smoking. 

On the other hand if the another fund manager had bought into Suzlon Energy, Pantaloon Retail, Financial technologies,Titan, and TV 18 If the markets fell by 30% and these stocks went down by 40% we have no problems guessing whom investors would have blamed. 

Market timing: Wangner explains the similarity between market timers through the zebra – lion relationship. Sometimes the zebra (in order to have the green grass) gets too near to the sleeping lion thinking that when the lion awakes they would make a quick run away into the open land. The lion does awake but by that time the zebras are already near the exit but the sheer number of zebras makes exit impossible for all the animals and some get caught. Institutional and retail investors want to time the market and normally buy and sell shares but their own buying and their own selling tends to have an opposite effect on the price leading to volatility and price swings. In the process they get caught trying to switch between cash and stocks.

Wangner does not end here he says that portfolio managers write economic forecasts that are wrong and boring. He would personally prefer writing a forecast that is interesting and wrong rather then wrong and boring. A forecast that is interesting and equally correct has been put on this forum.

Edited by basant - 21/Mar/2007 at 12:10pm