When size becomes a constraint

But HDFC Mutual's celebrated fund manager says one-year numbers don't mean anything as long-term performance holds key

In the last one year, HDFC Mutual Fund’s popular equity scheme -- HDFC Top 200 with assets of Rs 12,017 crore returned 5.6% compared to peer average of 9.17%.

Another one, HDFC Equity with assets of Rs 11,500 crore, returned 4.13%. These are not numbers that the market generally associates with Prashant Jain, HDFC Mutual’s celebrated chief investment officer (CIO).

But Jain is not perturbed, partly because criticisms at various junctures have been a part of his two-decade-old career in fund management.

"We may or may not do well at times, but one thing we have done successfully is that we have not lost serious money," said Jain, 45, in an interview at his Churchgate office in South Mumbai. The logic behind this comment may find its origins in the investment philosophy of Warren Buffett, one of the world’s most admired value investors, whom Jain looks up to. Jain is a believer of Buffett’s two rules for investing: 1. Never lose money. 2. Never forget rule No. 1.

Many in the market say one reason for the underperformance of the two schemes in the past one year is their fund size. The two schemes have the largest asset under management (AUM) in the domestic mutual fund industry with corpuses of over Rs10,000 crore each hindering the fund’s capability to churn higher returns.

.But Jain rebuts this criticism as well, terming them unfounded. "You have to look at the size of the funds in the context of the market in which we are dealing. Today, India's market cap is around $ 1.5 trillion ($ 1500 billion), out of it total equity mutual funds is $ 40 billion - around 2.5%," he said. Had equity assets been very large part of the market cap then performance may come under question, said Jain.

Both the schemes, put together, constitute 23% of HDFC Mutual’s total AUM of Rs 1,01,700 crore, the largest in the 44-member strong Indian mutual fund industry which has assets worth Rs 8.16 lakh crore.

What may have also affected the performance of the two schemes during the year is the sizeable exposure to some of the laggards. For instance, State Bank of India and Infosys, which have been underperformers, are among the top holdings in funds managed by Jain.

Fund analysts said it is the conviction in his views on stocks and sectors—even those which are shunned by the market-- that result in fund performances dipping during a one-year period. Also, his resolve to stay away from bubbles has resulted in his schemes underperforming in the near-term. For instance, Jain stayed away from Dalal Street bubbles in the real estate and infrastructure sectors in 2007 – 2008, while sold off early in consumer goods, a sector which has seen, in the last two years, one of its best runs ever.

“Though Prashant's investments are backed by deep research, sound logic and his great conviction, his schemes have taken a hit for some time now as some of his bets have not delivered,” said Dhirendra Kumar, chief executive of Delhi-based fund tracking firm Value Research. “He is also fighting a constraint as size of his funds has become large."

Notwithstanding the one-year underperformance, what set Jain apart is the fact that his funds have fetched superior returns in five-year periods. The funds have generate around 12-14% annualised returns in the last five years compared to the industry's category average returns of 8-9%.

Fund analysts and distributors said the long-term performance is one reason why investors continue to flock at the schemes that are managed by Jain even as the mutual fund industry is seeing redemptions and folio closures.  

Jain likens a fund manager’s performance to that of a batsman in cricket. "One year is like one match for us. What's important is the batting average. One must always look at the future because today's price is your cost. It does not matter whether I have purchased a stock at Rs 200 or Rs 4,000. If I like a company today, it does not mean that market will like it today. Even if I am right, market may take 2-3 years to realise it," said Jain, who is an engineer from IIT Kanpur and a management graduate from IIM Bangalore.

Jain, who partly agrees that he became a fund manager by accident, joined SBI Caps from IIM Campus and was shifted to its mutual fund division. In 1994, he moved to 20th Century Mutual Fund, which was later bought over by Zurich Mutual Fund.  HDFC later bought out Zurich.

Jain’s optimism about India’s prospects prompted him to stay back in the country, even as his college mates left to country in search of greener pastures.

"India has lot of natural resources (except oil), smart people and a large market. These three factors make us a promising growth economy which is globally competitive," he said.

This outlook for the Indian economy encourages Jain to believe that equities are the best asset class for investors with a long term view.

“Equities, broadly, increase purchasing power at close to real GDP growth rates whereas bonds and gold merely protect purchasing power over long periods,” he says. "The low returns from equities and high returns from gold in last five years should, in my opinion, be looked as an aberration and not as a guide for the future.”

Analysts at brokerages and investor relations executives at companies consider Jain as a ‘hard-to-please’ fund manager with strong views.  A head of institutional sales at a leading brokerage said, “Reaching him is a Herculean Task. Even if we manage to reach him after his initial checks, nobody has any clue that he would buy the idea.”

Jain has his reasons for trusting his own research and logic to zero in on his investments rather than just depend on company visits or analyst recommendations.

"I have seen, sometimes, meeting companies is not of great help. The management, themselves, in many cases are dealing with uncertainties and they are not in a great position to forecast the future. Many-a-times, they also have biases,” said Jain. “

It's human nature to extrapolate the present into the future. In good times, companies say growth will continue. If you meet an automobile company when the cycle is bad, what do you expect to hear? Only few companies or individuals are able to be dispassionate, take an objective view, move away from the present and have a more balanced view of the future," he said.

Jain believes one needs to be dispassionate in his own investment decisions. “If one believes that there has been a mistake and loss is permanent, one should sell (the stock)," he said.

'While we missed several good opportunities; we did not do too many mistakes'

Your thoughts on fund management business.

This business is all about three things - reading, listening and thinking. When I travel, it is the best time to read.

Is it hard to live up with rising expectations?

It is easier to build a track record or reputation than to maintain it.

Are you getting complacent?

There is no complacency either in me or the team because of our past or current position. In fact, if at all, our past and the expectations from us motivate us to work harder. We are also alert not to think short term because of our track record, which tends to make one more sensitive to short term pressures of performance.

Does backing of a strong brand help you?

The brand is a great enabler, it is not a guarantee to success. We have a long term track record and a good brand which gives more breathing space but that is not an infinite space.

How do you feel when you miss an opportunity?

Mistakes are bound to happen. We have made mistakes and mistakes will continue to happen, but we have done our homework and these mistakes have not been due to lack of effort. While we have missed several good opportunities, we have not made too many mistakes.