Two ‘Golds’ from HDFC Mutual Fund

By Himanshu Srivastava |  07-05-19 | 
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About the Author
Himanshu Srivastava is a Research Analyst with Morningstar. He would like to hear from you, but cannot give financial advice.

While HDFC Equity is a multi-cap fund and HDFC Top 100 is a large-cap offering, both are managed by Prashant Jain.

In 2018, our opinion on the parent changed owing to the issue around its private placement of shares to select distributors ahead of its IPO last year. This led to a downgrade in the fund house’s Parent Pillar rating from above average to average.

But with other positive attributes such as a supremely skilled manager, a robust investment process, and a stable and competitive team remaining intact, we continue to have conviction on both these funds. Hence, we reiterate the Morningstar Analyst Rating of Gold.

HDFC Equity

An unwavering focus on the long term and willingness to back conviction bets are integral to the investment approach of Prashant Jain. Hence, he doesn’t shy away from trading near-term pain for long-term gains.

This approach was on display in 2015 when Jain held on to his investments in public sector banks (particularly SBI) despite running into rough weather and the fund languishing in the bottom performance quartile. This was not surprising, as the manager has long favoured public sector banks in his portfolios as he believes that they will be major beneficiaries of India’s long-term structural growth.

Notwithstanding short-term blips, Jain has demonstrated considerable skill in navigating the fund through varying market conditions over the years. Expectedly, he made a promising comeback in 2016 as his conviction in public sector banks paid off well, helping it to record top quartile performance for the year. Pleasingly, the fund’s good run under Jain’s able stewardship has continued since then.

Research is central to the investment style, with Jain effortlessly combining top-down and bottom-up analysis (with more emphasis on the latter) to identify companies with robust business models, strong balance sheets, and competitive advantages. He pays heed to valuations while picking stocks, freely combining relative and absolute valuation methods.

While constructing the portfolio, Jain is mindful of the benchmark index weights but is not benchmark-aligned. His willingness to be disciplined and adhere to his investment style even when it is out of favour is noteworthy.

The process has its biases. The valuation conscious approach may cause the fund to lag peers in momentum-driven markets. The fund may also lag peers from its multi-cap category who may increase allocation to mid/small-cap stocks when they hit a purple patch.

HDFC Top 100

This fund and its manager have withstood the test of time. Prashant Jain has a long-term approach to investing that entails taking high-conviction bets and sticking to them if they underperform in the short-term; this has often yielded satisfactory results. Hence, it was not surprising that the fund made a strong comeback each time after hitting a rough patch. For instance, after delivering an indifferent performance in the years 2013 and 2015, the fund was back on its winning ways in the following years, reinforcing our conviction in the strategy and its execution under Jain.

Over the years, Jain has demonstrated considerable skill in navigating the fund across market conditions and ensured that it delivers pleasing results over the long term. With research at the core of Jain’s investment style, he effortlessly combines top-down and bottom-up analysis (with more emphasis on the latter) to identify companies with strong balance sheets and business models. He pays heed to valuations, freely combining relative and absolute valuation methods.

Despite largely investing in IISL Nifty 100 stocks, he has shown immense flair with portfolio positioning. His in-depth research has given him the confidence to take meaningful variances from index weights at both stock and sector levels. The fund has bested both the index and the category average over the long haul. The process also has its biases.

The valuation-conscious approach may cause the fund to lag peers in momentum-driven markets. Also, over the past few years, the fund has courted more risk compared with a typical category peer. Although this is in line with the manager’s investment style, it would help if investors invest in it from a long-term perspective.

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