 "Good value in sectors that saw serious stress in profitability in past few years: Prashant Jain")
HDFC Mutual Fund's Chief Investment Officer Prashant Jain, one of the longest serving fund managers in the Rs 16-lakh-crore fund industry, has faced some criticism in recent years because of the underperformance of his schemes. However, over the past few quarters, there has been a recovery in these. In an interview with Chandan Kishore Kant, while defending his investment in State Bank of India and explaining his other decisions, Jain says the economic outlook looks promising. Edited excerpts:
In the recent past, the number of your critics had increased. Did this make you angry or force you to re-look at your investment strategy?
Critics always help you to improve, both at personal and professional levels. There was no anger but a sense of disappointment at times, when one heard views not backed by proper reasoning or were not balanced. We have always listened to and analysed contrary opinions. After engaging with several such people, we realised that the views were either short-term focused, biased or selective with facts. So, we remained steadfast in our views and actually used the dip in some stock prices to our advantage. In this, I consider myself fortunate that our management and the vast majority of investors and distributors stood by us; the performance today is a result of that. The team was also conscious of the pressure and we worked harder than usual.
HDFC funds have recovered smartly in 2016, especially after the Budget, beating benchmarks and category average. Is this your answer to your critics? Is the recovery sustainable?
It is too early to call this a proper recovery. What we have seen so far is simply deep value becoming good value.
I would still like to wait for some time before one can feel that one’s views have been vindicated and that the pain the funds endured in 2015 has been suitably rewarded.
Your love for State Bank of India (sbi) is no secret. Despite all the problems at the bank, it remained one of your top holdings. Would you call it a mistake or were you ahead of the curve?
Some of the best calls have been the ones that gave pain initially. I feel the same will turn out to be true for SBI as well, over time. Our investment hypothesis in SBI was sound and has been consistent. What made our timing wrong was the sharp fall in steel prices in 2015, a delay in regulatory intervention and the large exposure of banks to this sector. The stress in steel impacted bank stocks materially. After considerable deliberation, we concluded that this actually was an opportunity for the patient investor, as the markets were pricing in 100 per cent loss ratios for the steel loans, which was not the case in our opinion.
I would leave the judgment to others to classify this decision as they deem fit. For me, an investment decision is wrong if it either leads to a permanent loss of capital or returns are below benchmark over the time horizon of the investment and it is too early to call that in this case. SBI actually is a high quality business — it has a solid retail franchise, its market share is stable, it has a leadership position in a growing market and the business adapts itself to changing times. However, the business has cyclical characteristics and it has passed through a down-cycle over the last few years, impacting the return ratios and valuations.
Aren’t you turning into a rigid fund manager due to your continued conviction in your portfolios’ top stocks? One gets the impression that you are more suited for seasoned investors , who understand your investment calls and remain patient.
Rigid connotes unwillingness to listen to a contrary opinion and to not judge it rationally. That we are certainly not. In fact, we have a discipline of meeting and documenting analysts who have a contrary opinion and we take their arguments very seriously. There are cases when we have changed our views after hearing well-made points. But in this case, we did not find merit in the arguments. We differed with analysts in several areas. The large projected capital shortfalls in banks have reduced sharply. The larger public banks have not lost any significant market share contrary to views that we hear each day. In any case, in banking, market share is not very important. The pain of asset quality has turned out to be similar in private corporate banks compared to their larger public counterparts. What has happened, in my opinion, is that the public banks recognised the pain earlier. The stress is being resolved by asset sales. Many of the stressed groups are cash poor but asset rich. One has to thus differentiate between non-performing asset classification and ultimate loss.
While the focused was and continues to be on banks, our views on oil companies, four-wheelers, metals, fast-moving consumer goods and pharmaceuticals have all by and large turned out to be correct. Several of these decisions were contrarian and some were made when the businesses were in pain and the valuations were much lower.
I would like to describe ourselves as investors who are rational, willing to learn and change, open to contrary views and guided by long-term fundamentals. At the same time, we are willing to differ from the majority opinion if that is what our research suggests as we did in this case (banks) or in 2007 when we preferred FMCG and pharma over infrastructure, or in 1999 when capex and commodities were a contrarian bet compared to information technology (IT).
I also feel that it is unfair to call the Indian investor not seasoned. The very large number of investors in our funds who have been with us across cycles is a testament to their maturity and understanding. I would like to believe that it is only the minority that churns frequently and I am confident that even they will over time mature into more seasoned investors.
In the recent past, quite often, you have said that Indian markets are in transition. What does this mean?
Equity markets have displayed six-eight year cycles in my experience. In 1995-2000, IT stocks were the leaders; in 2001-2007, it was capex, banks and commodities; and in 2008-2015, FMCG and pharma led. With low inflation and low interest rates which were high in the past, peaking of NPAs which were rising earlier, a low current account deficit and a stable rupee, the growth outlook for different sectors is changing and so should the market trends over time.
Does the recent sudden rally in Indian stocks worry you? Is there value?
How can there not be value when the market cap to GDP is near multi-year lows? What is true, however, is that there is not much value in sectors that have been leaders over the last five years. There is good value in sectors that have seen serious stress in profitability in the last few years. This will be more evident in price-earnings terms as well as profitability in these sectors gets restored driving down multiples. We are firmly on that path and the next two years should be sufficient for this to be evident.
What is the outlook for the economy and the different asset classes?
The outlook for the economy is very positive. All the macroeconomic indicators except private sector capex are positive. Even that should revive within a year. A large number of good steps have been taken by the government and regulators. I think the time is approaching when the results of these should be visible.
