The other day, I had an interesting conversation with J, who has been running a portfolio management service (PMS) for some years now. J is a well-respected name in the industry, investing over Rs 1,000 crore on behalf of clients, and besides being a portfolio manager, also writes some sharp pieces on trends and policies related to the stock market.
I was surprised to know that J, now in his early forties, had signed up for a two-year part-time MBA programme. I asked him if it had to do with a belief in the adage that there was no age for learning. Turns out that the motive was far less lofty.
In January, this year, the market regulator tweaked rules for portfolio managers, making it mandatory for the principal officer of the PMS provider to have both a professional qualification as well as a specified period of experience. Earlier, it was either qualification or experience.
Now a portfolio manager needs to have one of the following:
A professional qualification in finance, law, accountancy or business management from a university or an institution recognized by the Central Government or any State Government or a foreign university.
Also, the rule is applicable to all portfolio managers retrospectively, meaning that irrespective of the number of years you have put in as a portfolio manager, you will still need to have one of the abovementioned qualifications.
For portfolio managers who have been doing well for themselves, the rule is annoying, to put it mildly.
“It is not necessarily a bad thing,” says J, “provided you are learning something that has practical value.
“But out here, I am getting to learn some of the things that are so disconnected with reality that you may actually end up doing damage to your clients if you were to apply those learnings,” he said.
J gave an example.
“In last week’s class, a young professor said that money printing by governments leads to inflation. In theory, that may well be true. But look at the US and Japan—they have been printing money for quite some time now, without any impact on inflation. The textbooks haven’t kept pace with the changes in the real world.
Then there was this question about a computer worm of five years back. Even by that time’s standard, the worm was not very well known. Yes, the course tells you how to guard for worms when you are setting up your business. But I can’t see how remembering an obscure worm and being able to write about it helps you become a better fund manager for your client," says J.
The course teaches all the key terms used in finance, but without going into the nuances of it, he adds.
"For instance book value—the calculation of book value may be standard, but for banks, there is a difference in which how the RBI looks at the book value and how the Companies Act treats it. The same holds true for provisions made by banks. There is a difference in the RBI’s view and the Income Tax Department’s definition of it. These are the things that you learn in the real world.
Another important subject that is missing is forensic accounting.
"Only something like that can help you know if the management is being honest with its shareholders. Knowledge of textbook definitions is of no use. And given the number of accounting frauds that have come to light of late, knowledge of basics of forensic accounting is not just useful to know, but a must-know for aspiring stock market analysts and fund managers," he says.
In short, an MBA in finance may help lay the foundation for someone aspiring for a career in the securities market. But for somebody who has seen the practical side of market, the course is pretty much irrelevant unless they can make it more up to date.
"If anything, if you were to pick stocks based on what the textbooks tell you, the portfolio will be filled with junk. Companies like Satyam Computer were able to fool even the smartest of fund managers and analysts for a long time. So even experience has its limits,” J says.
He adds that instead, SEBI should have a certification course for portfolio managers, the way it has for Registered Investment Advisors and Research Analysts.But J's point about the lack of practical understanding that a theoretical course is able to build only brings to mind Nieztsche’s quote: “The doer alone learneth."