Prashant Jain is Head of Equities and he oversees a corpus of Rs 50 billion at HDFC Mutual Fund. He is a self-confessed India bull. Here's some of his investing tips...
From little acorns, mighty oaks do grow. Prashant Jain, a man who displays his wizardry at HDFC Mutual Fund. A company spawned by one of India’s great financial institutions HDFC. A graduate of IIT Kanpur, an MBA from IIM Bangalore, he is a self-confessed India bull.
Excerpts from an interview given to CNBC-TV18:
Q: You have been called fairly or unfairly, an accidental fund manager. Is it true?
Jain: I think it is partly true. If I look back on how my career has shaped, it is not by design, but I think chance has had a very important role to play. I have decided more often than not by avoiding what I did not like, not really going in for what you like.
Q: But you are comfortable with numbers, you are uncomfortable going abroad and you had a reputation of being a self-confessed India bull when you were a student. Is that true?
Jain: I think I did not realise at IIM - not in the initial years, but yes I have always had some love for India and that I think goes back to IIT, where if you saw lots of professors who gave up very promising careers, exceptional people, exceptionally talented, who came back to teach. So, you did have a feeling that this country has a good future and you should do something about it. I mean one should contribute towards it.
Q: But how do you relate that to a stock market career?
Jain: I think my coming to stock market was more a chance and certainly I did not relate confidence in India to that of making a career in the stock markets. And what happened at IIM was that I did not want to work for multinational companies, I preferred working for Indian companies. And in finance, there were only two Indian institutions who were on day one on the campus, ICICI and SBI Caps. ICICI said no to me, so they made my job easier. That left me with SBI Caps and they put me by chance in mutual funds. So, that is how I began my journey in stocks.
Q: And the rest as they say is history. But you moved on ultimately into one of the most honoured initials in Indian finance, HDFC. Were you aware of the great legacy that was surrounding this great institution?
Jain: I think I first heard about HDFC way back in 1991-92, when India Magnum Fund was then run by Mr Vinod Sethi. He used to own large amounts of this company. I had a look at this company and I found it very expensive. Of course, I did not realise what growth prospects, what pedigree and what values this institution represented. But I think over the years, through observing, through interacting, through talking to analysts, reading reports, I did become aware, what a great institution Mr. HT Parekh had set up and how that legacy has been carried forward very ably by Mr. Deepak Parekh.
Q: You started at the money market desk, how did you graduate on to equities?
Jain: Money markets was not the core activity at SBI Mutual Fund. So, people who joined afresh, they were given the money market desk and then after some time, they were moved to research. So, that is what I also did.
Q: One thing you’ve said in many interviews that I have read about you, is that the process is important, you should get the process right. Explain that to me?
Jain: I think there are two parts to investing. One is identifying the good investment opportunity and the second, that is equally important is, avoiding the big mistakes. I think if you get your process right, you can crack both.
The key elements of process, what we are trying to build at HDFC Mutual Fund is, one is to identify and build a team of specialists, who understand some verticals in the businesses well. I think you must understand the businesses where you are investing quite well. Not only it will throw up opportunities once in a while, it was also help you identify big mistakes, or avoid big mistakes.
I think the second part of the process is what we are aiming to build - to get our framework right, which encourages the individuals to focus on what they are good at. To maintain a certain quality in output, to do the homework properly, to be diligent about what you are producing and also to maintain a certain level of productivity. I mean, we would encourage people to look at one new idea every two or three months.
And finally I think we are also trying to build a framework, which has checks and balances in it, which encourages debate and dialogue and free exchange of views. If someone is taking a risk, which is more than what is the mandate, there are checks and balances.
Q: So no cowboy investing - discipline, numbers, process is important?
Jain: I think process is very important. It may not take you to the top, but it can certainly help you avoid big mistakes and we follow a very simple discipline of the code list. We have an approved list of companies, which is about 230. This list grows over time and what this list represents is businesses, which we believe are of an acceptable management quality.
Q: Why have you always placed a lot of importance on asset allocation?
Jain: I think what I have observed is that most common investors and even some institutional investors tend to focus a lot on timing the markets. But what I have realised is that not only it is not possible to time the markets, in fact there are any number of instances, where even professionals have got it completely wrong.
If you go back to September ’01, the markets were at the bottom, but the cash levels in many mutual funds were very high. In March 2000, the cash levels were nearly zero, when the markets were clearly peaking out. So, I think timing is not only very difficult but I think it also actually does not matter. Today, if you look back five years, whether you invested when the index was 3000 or 3500 or 2800, it does not matter.
Q: Because you are in the right at 14,000.
Jain: Yes. I think in a growth environment with the benefit of compounding and the long-term horizon, what looks like a large movement at some point of time, becomes quite insignificant and irrelevant after five or 10 years. If the economy continues to grow, this index after five or 10 years, should be two times or four times more. Then whether you invested at 12,000 or a 14,000 index is not relevant at all. What would matter then actually is, whether 10%, or 50% or 100% of your wealth is in equities.
Q: Let me play the devil’s advocate, I invested in ’92 at the top of that bull run, for 10 years I didn’t make any returns. So, timing was important then, wasn’t it?
Jain: When I say timing, I don’t mean to say that you should invest in bubble- like markets, or overvalued markets. When you look at valuations, when you look at growth prospects, you can take an informed, calculated educated guess on the market prospects over a three to five year period.
But what I mean by timing is, you can’t forecast whether the market will go up or come down in the short run. In 1992, the P/E multiples were about 40, the earnings yield was 2.5%, the bond yields were 18%. So, there was no way that equity markets would have outperformed bonds for long periods of time. But it did not mean that the markets would not have gone higher. An overvalued market can become even more overvalued and an undervalued market can become even more undervalued. So, I don’t think timing is important, but taking a balanced view of the market prospects, certainly is desirable.
Q: What about investing a large chunk over long terms?
Jain: I think if you believe that the Indian economy will continue to grow and profits will continue to grow and as long as valuations are not discounting too much of the future, I think over time, due to compounding, how much you invest in the markets, will have a far greater impact on your wealth, than timing bits and pieces.
Continued on Pg 2...
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