Prashant Jain is Head-Equities at HDFC Mutual Fund, one of the largest mutual funds in the country. The equity funds under management at HDFC MF are approximately Rs 15 bn.
Mr Jain joined HDFC Mutual Fund consequent to the acquisition of Zurich India Mutual Fund by the former. He was earlier the Chief Investment Officer at Zurich India Mutual Fund. He has 12 years of investment management experience. He had a long stint with Zurich India Mutual Fund – 10 years and was with that company since its inception in 1993. Prior to this, he worked with SBI Mutual Fund for 2 years in the areas of equity research and fund management. He has a Masters degree in Business Management from IIM, Bangalore. Before this, he obtained a Bachelors degree in Mechanical Engineering from IIT, Kanpur. He has also done his CFA charter from AIMR, USA in 2000.
As equity markets are witnessing one of the sharpest rallies seen in recent times, we decided to meet up with Mr Jain, one of the most respected names in fund management, to get his view on the economy, equity markets, HDFC MF’s investment strategy and his advice to the retail investor.
Pfn: What is your view on the Indian economy as of today?
Mr. Jain: I am positive about the Indian economy over the medium and long-term. In my opinion the growth over the next 5-10 years should be more than the growth over the last 5-10 years. What is going to lead this growth is changing demographics, stable asset prices, which means more affordability, cheaper consumer loans and more investments. The Indian corporate sector is in far better shape now, the manufacturing sector is a lot more competitive and we are now gaining export competitiveness even in this segment. The policy direction is right, although there may be a problem with the pace. Initiatives in power and infrastructure are also going to boost growth. Overall, I think we should be able to post 7-8% GDP growth over next 5-10 years. The numbers are not important, the key point is that the growth should be more in the future than the past.
Pfn: How do you believe this will flow to the corporate sector?
Mr. Jain: Growth in economy is good for corporates. Besides, companies are in better shape today than in the past – lower cost structures, better product quality and stronger balance sheets. Profits should therefore outpace topline.
Pfn: When you look at India as an economy and as a stock market, how does it compare with the global economy and markets?
Mr. Jain: I am not sure if I can comment adequately on the global economy. It is obvious that in terms of size we are relatively small in the global perspective. But in terms of P/E multiples and earnings growth and sustainability of growth, we are one of the most attractive.
Pfn: Coming more specifically to your funds – what is your investment strategy? What are the key criteria you have in mind while selecting a stock or a debt instrument?
Mr. Jain: First and foremost we invest in line with the investment mandate in terms of asset allocation. In terms of strategy, we have a distinct approach for each of our equity funds. In HDFC Equity Fund, we pursue a focused portfolio strategy with typically the number of stocks being 18-22. In HDFC Top 200 Fund we have a diversified investment strategy with an index-plus approach. In HDFC Prudence we have been pursuing a 60:40 (equity to debt) asset allocation for some time.
In terms of criteria, we invest in businesses we understand and if we don’t understand the business we try to understand it. But we do not invest in businesses that we don’t understand. We invest in businesses that we believe can grow their earnings at a reasonable level and try not to overpay for them. I think broadly the criteria are the same for most funds, differences are there in application.
Pfn: Coming to HDFC Prudence Fund, we have seen the fund perform well consistently across phases and has outperformed peers. To what do you attribute the successful performance of this fund?
Mr. Jain: We been doing what was sensible in our opinion within the mandate of the Fund. For example till Jan 1999, the Fund was overweight bonds and underweight equities; this was driven by high yields on debt, less attractive p/e multiples and mediocre growth prospects. Since then however, the Fund has been overweight equities and exposure has been maintained around 60%. One more key decision was moving out of IT stocks almost entirely in late 1999 and early 2000 as we felt the risk was too high at those levels.
To sum up in the last nearly 10 years that this Fund has been in existence, the Fund has endeavoured to invest in assets that offered good value, where the risk was limited and that were well understood. Of course, the Fund has never gone beyond its mandate in terms of asset allocation.
Pfn: Did you ever witness pressure because of your disciplined investment style? Say when you kept at arm’s length from software, a lot of investors may have felt that lets exit from this fund, it does not own software.
Mr. Jain: Discipline is to invest in line with the mandate of the Fund. This is important and has never been violated either in letter or in spirit. On the other hand, exiting IT stocks was not exactly discipline – it was more in the nature of an assessment, a view, an opinion. Fortunately our view was correct. But next time around one could be wrong. But yes, there was tremendous pressure for not owning IT stocks – in Jan- Mar 2000. The Fund also attracted hardly any inflows during that time, as the Fund underperformed during those three or so months.
Pfn: You were earlier in Zurich. Zurich, HDFC are among a handful of fund houses that never had a sectoral fund. What is your view on sectoral funds?
Mr. Jain: Sectoral funds add less value than diversified Funds as the Fund manager is constrained to invest only in a particular sector irrespective of the prospects and valuations, both of which can change with time. Therefore these funds are suitable for the initiated, sophisticated investor who has a view on a particular sector and knows when to enter and exit.
Pfn: Which sectors/stocks look particularly attractive to you?
Mr. Jain: I think in most sectors, there is growth and the P/E multiples are low. Some sectors may grow faster than others, but across the board sectors look attractive.
Pfn: Would this also include technology?
Mr. Jain: Technology is one sector where one cannot be sure. As billing rates are lowered this will put pressure on margins. This is a sector where P/Es are still double digit.
Pfn: What is your advice to the retail investor?
Mr. Jain: My advice to the retail investor is that from the short-term perspective, equities are most risky. But from the long-term perspective they are one of the safest assets.
Presently, given the continued growth in economy and corporate profits, and low p/e multiples, investors should invest that portion of wealth in equities where they have tolerance for volatility. This is so because, in short run, there is always a possibility of depreciation in equities. Further, money can be invested in phases, so as to reduce volatility of wealth. Lastly in equity investments patience is a virtue and the real gains accrue only to long term investors. This is more true in the current scenario where the room for upward movement in the markets is significant.
Pfn: From an investor’s perspective, how significant an event is a change in the scheme’s fund manager?
Mr. Jain: Fund managers are important, but not indispensable. By following a disciplined investment strategy and by having processes that ensure risk control, the risk of a change in the fund manager can be mitigated to a large extent.
Pfn: What books do you like to read?
Mr. Jain: I have read about Warren Buffet in bits and pieces and a lot of what he says makes sense. I also like John Bogle’s Mutual Fund Investor’s Handbook. I think it is very relevant from the retail investor’s perspective.
