Mind The Gap: Fund manager of Rs 66,000-cr scheme warns of potential earnings mismatch

Apart from the HDFC Flexi Cap Fund, Jain also manages the HDFC ELSS Tax Saver Fund and HDFC Focused 30 Fund, which have a cumulative AUM of nearly Rs 1 lakh crore.

Edited excerpts:

HDFC Flexicap has performed well on a long-term basis in the category. What has been the investment approach over the past decades?

Our disciplined investment approach, long-term orientation, and structured risk management framework have been  key. Over the years, we have consistently adhered to our philosophy of buying good quality businesses at reasonable prices. Investing with a medium to long-term view, avoiding fads, and abiding by our core investment principles has been our approach.

What is the underlying philosophy of the fund? What is your stock-selection criteria?

Our investment strategy revolves around a bottom-up approach to stock selection, with focus on quality companies at reasonable valuations. The idea is to select strong companies with growth drivers in the medium to long term. After a considered evaluation of the industry and business cycle, and the positioning of a company within a sector, we take a risk-adjusted position.

You are overweight on banks and underweight on midcaps compared to other flexicap funds. Why? 

In our view, some of the banks have long-term competitive advantages and will be able to capture growth opportunities in a risk-calibrated manner. India’s credit penetration in both the corporate and retail segments is still lower than that of peer economies. The continuing formalisation of the economy and use of technology is helping expand the lending pool for banks.

These factors, in the context of an economy that has several growth levers, provide the banking sector with multi-year growth opportunities. Banks that are well placed by virtue of their business models to take advantage of these  opportunities in a risk-calibrated manner should do well over the long term.

Given the current valuations, we find the risk-reward trade-off favourable in the largecap segment.

Any sectoral or market cap changes you expect to make this year?

We do not adjust our portfolio based on transition to a new calendar year. We remain committed to our strategy of staying diversified via good quality and attractively valued companies that have the ability to traverse business / economic cycles,  while avoiding companies where performance is due to only unsustainable short-term  factors.

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The accent is on companies with medium term growth drivers, disciplined capital allocation, a strong governance framework, and which are trading at reasonable valuations. The exposure to a market cap segment is the outcome of the growth and return outlook of the companies, valuations, liquidity, and market cap segment weight in the benchmark.

You took over the fund in 2022. What changes have you made in terms of the style of investing or fund management during your tenure?

Broadly, we've continued to buy good quality businesses at reasonable prices. However, with changes in market dynamics, there have been a few changes in the portfolio. We have increased our exposure towards healthcare and the consumer discretionary sectors, while exposure in industrials and energy has been reduced. The portfolio continues to be tilted towards largecaps.

HDFC Flexi Cap Fund is one of the biggest active funds. Is managing a large scheme a challenge?

We don’t believe that managing a large fund  is a constraint. Based on historical data, there is no correlation between fund size and returns. There have been periods where funds with a large AUM have outperformed those with a small AUM, and vice versa. Also, over the years, the investable universe has expanded as more companies have been listed.

What is your outlook and strategy for 2025?

Over the medium to long term, we remain optimistic on Indian equities considering a structurally robust domestic growth outlook, healthy corporate profitability, and supportive pro-growth policies. While we always aspire to follow a disciplined stock-specific, bottom-up approach to investing, given that the markets are trading at a premium relative to their historic averages,  this becomes even more important in 2025.

What is the one big risk that you foresee this calendar year?

The biggest risk in 2025 is the potential mismatch between expected and actual earnings. This gap could be influenced by various factors, such as geopolitical events, domestic policies, or sector-specific dynamics. Each sector and stock will be impacted differently, depending on the specific challenges they face.

While geopolitical factors may play a significant role for some sectors, others might be more sensitive to domestic policy changes. The key is to focus on investing in stocks where the discrepancy between earnings expectations and actual performance is minimised, as this can significantly affect market performance.

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