How Prashant Jain's funds bounced back from a lukewarm 2013

The knock-out performance by the ace fund manager comes a year after each of his three funds underperformed their respective benchmarks by a few percentage points in 2013 – in a sideways-to-uptrending market that proved to be a happy hunting ground for many other managers.

Jain who started his career in 1994 and has stayed with the same fund house since (even as his employer itself got acquired twice) has made a name for himself among investors and followers of the fund industry, thanks to his funds’ long-term performance (20-22 percent over the past 10 years), as well as for his soft-spoken demeanor and a calm-headed approach to investing that makes him place utmost importance on research, fundamentals and valuations.

Another aspect of the ace fund manager’s investing approach is he keeps his emotions – of greed and fear that sway many a great investor – under impressive check and it is this trait that led him to stay away from the dotcom and real estate bubbles of 2000 and 2007, risking underperformance while others continued to bask in the short term glory of hot stocks. But over the long term, he had always come out ahead.

Did Jain lose his touch, or investors their perspective?

So it was a bit surprising that, in the face of a year’s underperformance, some investors last year were quick to start questioning whether the ace fund manager was “losing his touch”.

Others wondered whether the fund manager was unable to recreate his magic because he now wielded a large portfolio, which was restricting his stock-picking abilities (the two flagship funds were and are the biggest in the industry and were then managing about Rs 20,000 crore in total) or whether he only had had a run of pure luck all along, which was now running out.

At heart was a broad call that Jain made on the country’s economic recovery in 2013, in which he piled on to stocks he expected to benefit, chiefly banks (such as SBI and ICICI Bank) and companies in the core sector (L&T, Tata Steel, Coal India, REC) – but a fall in the rupee put paid to his call.

Jain did what he does best when he has conviction in his bets. He sat on the portfolio and did nothing, in the belief that even as the timing of his call may have been early, his bet would pay off as the economy turns. Which it did.

His top stocks such as SBI and ICICI Bank rallied sharply this year, pushing his funds near the top of the heap.

Jain is known for batting for equities and often goes out to exhort investors to buy when there is gloom and doom all around and, with sage-like countenance, points out that that is precisely the time to buy, such as when he did in May 2012 when the Sensex had dropped to 16,000. Like Warren Buffett, he often says markets are driven by sentiments in the short term, which can be exploited to one’s profit.

But what happened last year was a classic case of sentiment turning against Jain himself, when investors started overweighting recent underperformance of his funds and expecting it, like bad times, to continue.

In a blog post earlier this year, fund analyst Vicky Mehta talks about how at a gathering in 2013, mutual fund distributors and financial advisors were complaining about the underperformance at the HDFC funds and lamented how Jain was now “a spent force”. In early 2014, as the performance turned around, “Jain and his funds were being eulogized by the same set of distributors, advisors and investors,” he writes.

The HDFC twins (Top 200 and Equity) are among the only nine schemes out of 87 fund-research firm Morningstar rates as a ‘Gold’, implying its highest conviction in the funds’ ability to outperform peers over the long term.

Fact is, Jain follows a particular investment strategy, which may not pay off year after year or see the fund land in the top quartile of performances every time.

At the same time, “the valuation consciousness and aversion to speculative fare could cause the fund to lag the competition in momentum-driven markets,” writes Morningstar analyst Himanshu Srivastava in a research note on HDFC Top 200.

“But we continue to like the fund for the following reasons: an outstanding manager, a robust process and one of the best asset management companies,” he adds.