One of India’s longest-serving mutual-fund managers, Prashant Jain, the chief investment officer of HDFC AMC, quit in late July, leaving behind a rich legacy.
Here is the full, unedited text of सार (read as 'saar', which means essence), a note written by Jain over a month after he resigned from his position:
“Son, I am extremely sorry, the sought-after roles in merchant banking, project appraisal, marketing have been filled up and I can only offer you equity research”. These are the words of Late Shri N Sriram, GM, SBI Mutual Fund, someday in May 1991.
Thus began my journey in the world of investing. I became the second member of the equity research team of SBI Mutual Fund (first being E A Sundaram). It was he who introduced me to the world of EPS, P/E, ROCE, ROE etc. (valuation metrics like EV/EBITDA, EV/Sales etc. originated later.)
While I was still grappling with the basics of equities, I was given additional responsibility of handling the money market desk – one more reminder of the importance or lack of it of equity research in those days. My introduction to the world of lending happened precisely at the time of the securities scam. My brief stint was an eventful one, but this is not the space to discuss that. I came out unscathed, in my opinion, ironically due to my lack of experience and my discomfort with lending hundreds and thousands of crores. Also, an early morning call (I used to hit the office by 8 am to escape the rush in Mumbai local trains) from someone who had the details of a deal maturing that day (which he was not supposed to have) made me cautious.
being sold to HDFC Mutual Fund in 2003. I thus changed a few business cards with no effort.It was because of my brief stint in fixed income at SBIMF, that I was assigned Centurion Prudence Fund, a close ended balanced fund in 1994. This Fund was renamed Zurich India Prudence Fund, HDFC Prudence Fund and finally HDFC Balanced Advantage Fund (BAF) over the years. On turning open ended in 1999, the Fund shrank to a mere Rs 9.9 crore (1 crore: 10 million), probably because the NAV was above par. From this to approximately Rs 46,000 crore in July 2022 when I handed over the reins
don’t, they pay it.
I was also managing HDFC Flexi Cap Fund since 2003 (for approximately 19 years) and HDFC Top 100 Fund since 1999 (for approximately 23 years). The table below gives a summary of the performance of these funds as on 28th July, 2022 in five year buckets and since inception
Also read: Parting Note | Best is yet to come in PSU stocks, says Prashant Jain
The table below gives a summary of the scorecard (distribution of gains / losses) between October 2003-July 2022 across the 3 funds that I managed. Data prior to this is not available but given the very small size of the funds then, the difference will be insignificant.
As is evident, investments were made in a total of 465 stocks. One in four resulted in a loss. Of the total net gains of approximately 87,000 crores (including dividends), 55 stocks accounted for a gain of more than 74,000 crores (including estimated dividends) i.e. 85% of total. If only one had the wisdom of avoiding 90% of the investments and instead invested more in the 55 stocks!
Looked in another way, this journey of Rs 100 going to Rs.10,940 was largely a result of 6-8 key decisions.
1. IT cycle of mid to late 90’s – Between Jan 1996 to February 2000, IT index went up a massive 95 times. This was a time when the economy was being opened up, imports were being eased, inflation and interest rates were running high and manufacturing was in pain due to years of high protection and inefficiencies. I distinctly remember having purchased Tata Steel bonds (SPNs) at 22% YTM and that Tata steel employed approximately 70,000 to make 2.7 mt of steel compared to less than 40,000 today (Indian operations) to make 20 mt of steel!2. Old economy strikes back - The rapid growth in IT sector and pain in manufacturing / economy did the inevitable. While IT stocks multiplied, the rest of the markets suffered. As this trend gained momentum it created excesses at both the ends. This is where, based on some very basic working the portfolio went underweight IT and overweight old economy (capital goods, auto, metals, cement etc.) towards the end of calendar year 1999. After some sharp but brief pain, the results were extraordinary. As commodity prices rose (coinciding with China entering the rapid growth phase), as capex recovered, as manufacturing gained in efficiency and as
leading private sector bank etc. There were several multi-baggers in the portfolio over this period.3. The turn of FMCG / Pharma - What happened to commodities, capital goods, auto, etc. in the IT bull cycle happened to FMCG / pharma etc. next. The rapidly rising share prices and consequent popularity of capex, commodities, NBFC, power etc. led to FMCG / pharma dropping out of favour and over time many companies in this space were available for a song. Believe it or not, many argued and advised that FMCG is a mature business not worth 15-20 multiples! Compare that with the 50-80 multiples today as GARP (Growth at reasonable price) gave way to BAAP (buy at any price) over the last decade. Fortunately, the Fund was rightly positioned, had lightened up on leaders of the last cycle due to excessive valuations and
shifted focus to FMCG/ Pharma to a decent extent. Once again, this caused sharp and brief underperformance in the last leg of the pre-Lehman rally but set the Fund on a strong footing for the next several years. This was the third big wave that benefitted the fund. There were multi baggers in this phase as well, though the number and magnitude of gains were lower.
4. Somewhere in mid 2010’s as FMCG / Pharma sharply rerated and capital goods, utilities, corporate banks sharply de-rated, I took the call to move from FMCG / Pharma to some of these sectors in a phased manner. This decision did not play out as anticipated for a while and tested the patience of investors, distributors, management and me alike. Covid / lockdown also hurt the economic sensitive sectors on one hand and US interest rates falling to record lows, corporate tax cut, etc. rerated FMCG even further, thus extending the period of underperformance. The downsizing in Pharma however proved to be correct and this cushioned the performance.
5. Fortunately, I not only persisted with the portfolio positioning but doubled down in some cases as with the adverse price movement, risk reward had become more compelling. Over time as normalcy returned, the performance recovered strongly and quickly. The pain of few years was gone in a few quarters. What helped in this phase was good understanding of the businesses and the strength of the investee companies that emerged winners once this phase was over. The understanding and support of management, board, trustees, investors, distributors and colleagues was invaluable in this phase and I would like to place on record my gratitude for them. In my judgement, this phase is not yet over and there is juice left in this portfolio positioning especially in energy sector.Every mark tells a story
media, the rise of China, Covid - lockdown, negative interest rates and ESG as a theme, to name a few. Phew!a. Many experts have said this before. In my experience too, efficient markets hypothesis does not hold true, especially over short to medium periods. Markets can be driven by emotion and herd behaviour for extended periods and thus keep on throwing opportunities once in a while. The best opportunities are to found either in most difficult market conditions or in most polarized markets. Investing is, thus, more about emotional
quotient than about IQ.b. Sizing is very important. Any portfolio will have its share of big winners, winners, losers and big losers. In my case roughly 1/4 were losers, 1/100 were big losers, 1/20 were big winners and the rest were winners. However, it is interesting to note that gains on one large winner were more than the total losses of all loss making investments. This highlights the importance of sizing – of assessment of the risk-reward associated with individual
investments and sizing accordingly.c. The data above in (b) highlights what Warren buffet has famously said – Rule no 1 don’t lose money, rule 2, don’t forget rule no 1. I have made more mistakes of omission than commission – some prominent missed opportunities were Asian Paints, Bajaj Finance, Eicher, Kotak Bank, Divi’s laboratories, etc., but successfully avoided the long list of businesses that caused large and permanent loss of capital. A list of some prominent
sectors to which many of these companies belonged were TMT, real estate, NBFCs, select banks, infrastructure, telecom, power, media etc. What is particularly satisfying is that most of these were never invested in irrespective of price.
d. Markets are reasonably efficient over long periods. The duration of mispricing or inefficiency can vary from several quarters to several years. It is important in this period to stay the course and to remain solvent (for a mutual fund manager this means to retain the job/fund). Having an alignment of interest (in the case of a fund manager this means being invested substantially in the same fund) helps at such times. Fortunately, the longer the mispricing, typically the higher is the catchup. Markets thus reward in most cases for the entire of period of pain. The only catch here is that the intrinsic value of the business per share should not erode in this phase.
e Equities are a generous asset class. The tailwind of a growing economy and growing companies overshadows mistakes of timing and security selection in diversified portfolios in most cases over long periods. The key is patience to stay invested for long periods.
This brings me to some issues where the debate is ongoing and the jury is still out. I cannot resist my two bits to add to the confusion on these issues.Unsettled issues
equities – especially given the low allocation to equities for a majority of households.
I am not able to resist an anecdote here. While sharing stage with the erstwhile CIO of a leading MNC Mutual Fund, somewhere in late 90s or early 2000s, I heard him say in his opening remarks
to a thunderous applause!
(This is cheeky adaptation of dialogue from a famous Hindi movie “Devdas” where in the protagonist is delving on his well wishers advising him on to get rid of bad habits or toxic relation from his life)While outperforming benchmarks is not easy and will probably get tougher, especially net of expenses, some managers should be able to outperform over time. In most cases, this outperformance is however unlikely to be linear or consistent. Significant divergence of portfolios from benchmarks and consequently a higher tracking error (that many equate to risk, though there are strong arguments to the contrary) will be needed in many cases to
overcome the hurdle of costs and to generate alpha over long periods in my judgement.Public Sector Undertakings (PSUs)
None of my meetings with investors / distributors were complete without a discussion on PSUs over the last few years. This was probably because of the sharp underperformance of PSUs in CY18-CY20 and because my funds had significant exposure to this group. The table below gives the performance of BSE PSU Index.
It is evident that PSUs have not underperformed across all time periods. However, the underperformance of Jan 18-Oct 20 was so sharp that it led to underperformance even over longer time periods, creating an impression that PSUs are no good. Such strong was this belief that people of all hues – young and old, experienced and amateurs, investment professionals and non-investment professionals, were convinced that PSUs were going to underperform perpetually. As is often the case in investing, herd behaviour and majority opinion is more often wrong than right. The sharp outperformance of PSUs in recent years (I believe the best is yet to come) has reiterated this once again. This sequence of events has further highlighted the impact that price performance has on the opinion of market participants. It is heartening to see PSUs increasingly finding their way to more and more mutual fund portfolios and I am confident they will over time find their way into more FII portfolios and direct portfolios as
There were two key reasonsin my opinion behind the underperformance of PSUs during CY18-20 – ETFs and Core sectors of the economy not doing well. It is interesting to note that PSUs are not present in FMCG, Retail, pharma, IT etc. They are mainly in energy, corporate banks, capital spending, etc. Over time as ETFs were done away with and as the core economy recovered, PSUs performance has turned.ESG
to observe the continued acceptability of exclusion based investing in the face of potential underperformance. This turn of events once again highlights how rationality eventually prevails.Moving on
has proven its mettle once again over GAAP (growth at any price) investing and most important the investment team (both equity and debt) at HDFC AMC is second to none in the country and the best that I have had in my career. I had a strong desire to move when NAVs were near all-time high and when there was alpha across time periods. I thus ran out of reasons to hang in. As if this was not enough, the assets under my management crossed Rs 100,000 crores few days before I tendered my resignation – I take this as a divine nudge to me to make way for others.
I consider myself fortunate and blessed to end this innings on a winning note and to have achieved a seamless and smooth transition. Fund management is like a non-stop relay race. Each runner desires to hand the baton ahead of competition and in a seamless manner. Not only has the transition been seamless, more importantly, the funds are in very experienced hands.अनुगृहितोऽस्मि
The source of whatever I am saying / doing is my heart where my teachers reside. It is because of their blessings and guidance that I am able to do things effortlessly.
I also seek forgiveness from all those whom I have knowingly or unknowingly hurt through my thoughts, words or actions in this journey.The last word
I don’t have words to describe the incredible journey of last 30 years. Looking back at the sequence of events, I honestly feel that I was incredibly lucky to be at the right place at the right time not once but on several occasions. Whenever I was about to take a wrong turn, some invisible hand nudged me in the right direction. The only credit I can take is that of doing my best every single day. I wouldn’t mind doing it all over again.30th August 2022
Prashant JainNote: अनुगृहितोऽस्मि, read as anugrihitosmi, means thank you.