HDFC Top 200
Prashant Jain’s investment approach is research-oriented. He looks for quality companies with robust business models, clean balance sheets, and competitive strengths. Jain's approach can be better understood from the way he works. He studies hard copies of company disclosures so he can see footnotes that may get lost when data is transferred to electronic format.
While stocks are picked on a bottom-up basis, he also takes into account the macroeconomic environment.
Both relative and absolute valuation methods are used to pick stocks.
While Jain is mindful of benchmark weights and invests almost all of the assets in S&P BSE 200 stocks, he also takes significant bets versus the benchmark on stocks and sectors to deliver outperformance.
Large-caps dominate the portfolio. On average, large-caps have accounted for roughly 89% of assets versus the category norm of about 84% over the past five years.
The investment process points to a long-term orientation and the fund manager prefers being fully invested at all times.
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HDFC Equity
Prashant Jain isn’t benchmark-conscious while constructing the portfolio. However, when he fails to uncover enough stocks that can generate alpha or believes that valuations are stretched, he will not shy away from aligning the portfolio with that of the IISL Nifty 500 index. For instance, in 2015, weights of sectors like utilities, communication services, and energy were loosely aligned with that of the benchmark index. But that is not to suggest that Jain is a closet indexer. The portfolio’s top pick, SBI, had a significant overweight position versus its weight in the index.
Typical of his investment approach, Jain’s conviction stemmed from a combination of robust fundamentals, attractive valuations, and a potential economic turnaround.
The portfolio has an apparent large-cap bias, usually accounting for 75%-80% of assets.
The portfolio displays a fair degree of consistency over longer periods; the fund’s turnover ratio (March 2015, 39%, March 2016, 37%) bears out Jain’s long-term investment horizon.
Taking cash calls is not a part of Jain’s investment strategy. Over a 5-year period ended December 2016, the fund’s allocation to cash/current assets has been less than 1% vis-à-vis the category norm of 4%. He has adhered to this strategy even in the downturns of 2008, 2011, and 2013.
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HDFC Growth
The fund’s high exposure to mid/small-cap stocks produced a dismal performance in 2013, so Srinivas Rao Ravuri tweaked the strategy and capped its exposure to mid/small caps at 20% as against 30%-35% earlier. The strategy was modified to get the portfolio closer to its pure large-cap benchmark index (S&P BSE Sensex) to achieve a comparable risk/reward profile. Nevertheless, his broader investment strategy remains consistent.
The manager scouts for companies with strong business models and skilled management teams. He evaluates stocks using a combination of relative valuation parameters such as P/E, price/book value and other quantitative measures such as return on capital employed. Broadly speaking, the approach can be termed “growth at a reasonable price.”
Ravuri displays a willingness to be flexible-- that is, stocks that do not meet all of his qualitative criteria may still be a part of the portfolio provided they pass his basic checks. He is valuation-conscious and will not hesitate to sell/pare holdings he considers expensive. After being wrong-footed with cash calls during the upturn of 2009, he now stays fully invested at all times.
Although the manager’s emphasis on quality and valuations is unlikely to deliver pleasing results over the short term or in momentum-driven market conditions, we expect it to pay off over the long term.
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HDFC Mid-Cap Opportunities
Chirag Setalvad emphasises understanding the niceties of a business before investing. Like all equity managers from the AMC, he adopts a hands-on approach towards research with a view to identify companies with robust business models, strong competitive advantages, and clean balance sheets. Company meetings are an integral part of the evaluation process.
Setalvad looks for tangible business models with a strong track record. Emerging/niche companies with untested business models don’t find favour with him. He typically looks for companies that can generate reasonable free cash flow and have high returns on equity.
He combines absolute and relative valuation parameters to select stocks that aren’t too expensive relative to their growth prospects. The portfolio’s price/earning multiples tend to be slightly lower as compared with the category averages. Broadly speaking, the investment style can be characterised as growth at a reasonable price.
The investment process is evidently closer to a bottom-up approach. At its core, the process is reasonably simple and well-defined. For the process to succeed, getting the research correct is primary. Setalvad is proficient on that front and has adequate support from the investment team. He has been able to consistently execute the strategy with skill.
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