The exit of Prashant Jain, the largest public equity mutual fund manager in the country stands out as a case study of sorts for more than what the market may have recognised yet. A study of his portfolio reveals that not only was he a contrarian investor not shying away from unpopular value bets, he has also realigned his portfolios to make it more palatable for the incoming fund manager who will carry the burden of stepping into his large shoes but may not have the clout to carry on high exposure to stocks far removed from popular appeal and prevailing market sentiment.
Over the past year, Jain has sold down his ‘contrarian’ bets right from Coal India, NTPC, SBI, ITC, Power Grid Corporation and REC. Jain has held these stocks for several years based on their intrinsic value and even doubled down on some of them as the market failed to recognise their worth and the stock prices fell. The doubling down helped him make a comeback when the tide turned for these stocks.
Although several of his contrarian calls are back in the reckoning, and the value trade continues to be in play in the wake of growth uncertainty in several businesses, Jain has trimmed exposure to these stocks from the levels he has maintained in the past few years.
SBI, which used to be the top holding in two funds HDFC Flexicap (9.94%) and HDFC Balanced Advantage Fund (9.38%) as on June 30, 2021, continues to remain on top of the pack but exposure to the bank has been cut to 8.15% and 7.10% respectively. The stock used to be the third biggest holding in HDFC Top 100 (6.69%) and now ranks sixth with an exposure of 4.59%. Jain has sold 14 million shares under the Flexicap Fund, 27.8 million shares in the Balanced Advantage Fund and 12 million shares under the Top 100 fund during the past year.
His next big bet NTPC, which was his second biggest holding in Balanced Advantage Fund (5.15%), fifth holding in Flexicap Fund (5.25%) are now down to 3.9% and 4.4% of the respective fund’s net asset value. He has sold off 67 million shares and 32 million shares in the two funds respectively. Now, NTPC ranks fifth in the Balanced Advantage portfolio and seventh in the Flexicap portfolio. Similarly, in Coal India, another top holding, he has sold off 22 million shares and 13 million shares under the Balanced Advantage Fund and Flexicap Fund respectively. Now, Coal India ranks third in Balanced Advantage, seventh in the Top 100 portfolio and eighth in the Flexicap fund. Similarly, exposure has been cut to stocks like Power Grid Corporation, Power Finance Corporation, and REC which Jain has been a big votary of thanks to their high dividend yield.
While the trimming could also have been triggered by other considerations including profit booking, that seems unlikely as neither have these stocks become too expensive to own, not has anything changed remarkably with respect to their fundamentals that could meaningfully alter their intrinsic value, the main driver of stock prices over the long-term and central to Jain’s stock picking style. Purely based on valuation relative to the rest of the market too, several of these stocks still fall in the value zone.
Notable additions in the portfolio from the PSU space include Bharat Electronics, Bharat Dynamics and Container Corporation of India. Meaningful additions from the private sector over the past year include Infosys Technologies, TCS, Reliance Industries and Mahindra & Mahindra among others. None of these are particularly contrarian today.
Although there is no major precedence, exit of a fund manager could potentially create a risk for the fund portfolios. If the market perceives a possible re-shuffling of the portfolio based on the style of the incoming manager, key holdings could be face the heat. Considering that Jain’s portfolios have had exposure to stocks other managers do not fancy, the realignment seems to have been orchestrated to facilitate a smooth transition without any damage to the portfolio value.
Rumours about Jain exit first started doing the rounds in September 2020. In the past year, many of Jain’s funds clawed back to the top of the performance table. Cutting some of Jain’s key bets to size seems to be a well-planned transition strategy which has been underway for more than a year.
On Tuesday, none of Jain’s favourites showed any weakness.
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