Consistency pays

A focus on secular growth businesses at a reasonable price, especially at a time when the markets are paying a premium for quality stocks, has helped Prashant Jain beat the benchmarks.

Equity markets have not been the best place to park your funds over the last fiscal and in the recent past. If you did, you would have been staring at losses considering that the leading indices are down by about 10 per cent. A spike in commodity prices, high interest rates, the fears of a slowdown in the global and Indian economies have meant a bumpy ride for equity investments. In comparison, HDFC Mutual Fund’s chief investment officer and executive director, Prashant Jain, has been able to outperform the broader markets and respective benchmarks. The Business Standard Equity Fund Manager of the Year 2011 believes that his strategy of investing in good quality, reasonably valued stocks and to remain diversified has helped generate returns and outperform benchmarks over a period of time. “What worked for us is that markets have been very focused on quality after the 2008 meltdown, which is conducive to our approach.”

However, Jain has not only outperformed the benchmark for a year but over longer periods as well, ending up at the top quartile consistently. “We avoid stocks which are either not of good quality or are sharply overvalued,” he says. The approach however did not work in 2007, when stocks of all hues did exceedingly well. Rather than compromising on his long-term approach to investments, Jain has had to tolerate underperformance for some time. The long-term for Jain is a period of two-three years. “We invest with a two-year view because we have confidence and visibility about the prospects of the business,” he says.
 

FUND STATS
	Equity Fund	Top 200
Corpus (Rs cr)	9,739	11,065
Returns (%) March 31 ’11	15.90	13.20
Top sector holdings
Banks	20.66	19.59
Miscellaneous	19.40	18.96
Oil & Gas	11.56	12.30
Software	10.31	8.91
Telecom+FMCG	4.12	10.47
All data except returns as on August 31, 2011                                  Source: ICRA

Given asset quality concerns, is Jain worried since a fifth of the portfolio is in financials? “In a rising interest rate environment, slowdown in some sectors could lead to an increase in non-performing assets (NPA). I think it is a valid concern but the valuations more than adequately discount for that,” he says. When he picked up these stocks did he opt for top down or bottom up approach? For Jain, the approach is a mix of the two. “The top-down view could be that on aggregate they (banks) are likely to grow faster than the economy and are unlikely to have systemic NPA problems. The bottom-up approach would be to focus only on large banks because they have advantages such as low cost of deposits due to higher brand equity, reach, more diversified portfolios and slightly better pricing power,” he says.

With some sectors such as commodities influenced by global factors, how does Jain manage his investments? “We by and large invest in secular growth businesses and look at global cyclicals only when they offer meaningful value,” he says. Given the uncertainties in the business, the investments in such sectors are tightly controlled and he limits it to 5-10 per cent of the overall portfolio.

Focus on value, not price
While there are many criteria for investments such as management track record, profitability, industry dynamics, for Jain the key is the sustainability of business. “If a business is competitive, even if you pay a slightly higher price you can make money over time,” he says. The higher the sustainable growth, the higher the multiple that Jain is willing to pay.

Though the decision to buy is based on what Jain terms growth at a reasonable price, when does the sell call come into play? The answer is not so much the returns but whether the business is overvalued or undervalued. “What you must consider is whether at a particular price it is a good investment or not. Even if you bought a stock for Rs 100 and it is now Rs 50, if you think it is a good investment you have to hold on to it. Your profit or loss should not dictate whether you should buy or sell or hold today,” says Jain adding that there are stocks in his portfolio which have gone up 5-6 times and he continues to hold on to them.

Hits and misses
Investment in banks has worked for the fund. Jain bought them in 2008 on the premise that impact of the global crisis on Indian banks will be minimal and the valuations were dirt cheap. The second area that worked out is consumer stocks such as Titan. Due to the uncertainties during that period, the stock was undervalued as buyers postponed their jewellery purchases. “Given the love for gold in India, it could not have remained like that for long,” says Jain.

While in retrospect, decisions taken during the meltdown seem smart, how was he able to get the confidence to stay the course when everything was falling around him? “It isn’t the case that I am not scared when I am buying. There is always the fear of losing money. But you have to do what you believe is right over long periods of time. That is the only way you can make your investments work,” he says. While he is under pressure to deliver, Jain says his ability to manage stress has improved over his investing career in which he has seen many cycles. “In the end, markets are efficient. If your understanding of a company is right, markets will reward you. The focus is to build an understanding of the business, so that belief is stronger now. Do your homework, if your homework is right, it is a matter of time,” says Jain.

However, there were occasions when he got it wrong. Investment in oil companies was one such. The scrips are undervalued on a replacement cost basis. The underlying thought was that one day oil reforms will happen, but that day has not come for many, many years, rues Jain.