You ask Prashant Jain, Executive Director and Chief Investment Officer, HDFC Mutual Fund, what he thinks the market will do over the next few months and you will likely be met with a straight-bat answer on the lines of: I don't know about the short term but it's going to be higher a few years from now.
So we sat down with the normally-reclusive fund manager to question him on his approach to investing, his funds and his experiences.
For the uninitiated, Prashant Jain is widely regarded as one of the best fund managers in India, with his flagship funds, HDFC Top 200 and HDFC Equity, having returned about 29% annualized growth over the past 10 years.
He has been managing the balanced fund HDFC Prudence (earlier Zurich India Prudence Fund), right since its launch (including in the previous avatar) back in 1994, with nearly 20% annualized growth since inception.
An engineer from IIT Kanpur and an MBA from IIM Bangalore, Jain joined Zurich Mutual Fund in the mid-90s and stayed on when HDFC Mutual Fund acquired the former in 2003.
Here is the interview.
You have been in charge of your funds for a really long time now. What is the secret behind the longevity?
It was not planned that way in 1994. Having said that, I have believed that things even out over long periods, so there was no compelling reason to move either to avoid short term pain or for short term gains; besides destiny has also played an important role for sure.
Your investment philosophy comes across as being focused on the really long term and imagining things ahead of others. What do you think are your personal qualities that have led to your investment success? Is it being able to take a bird’s eye view of things yet not missing out on the important details that matter, is it being a contrarian, is it being able to cut out the noise from the substance?
My education as an engineer, encourages me to analyse, understand and then reach conclusions rather than taking opinion of others at face value. This and the confidence that the markets can err in short periods but are more reliable over long periods gives me the confidence to hold on in times when the going is not good, if the conclusions reached are sound.
It is no doubt important to get the big picture right, yet not miss important details. Finally, what is important is the strength of the argument; whether the conclusion is a contrarian one or not is just incidental.
I have read somewhere you do not particularly have one investing idol that you try and emulate. But if we talk about the likes of Warren Buffett, Peter Lynch and John Bogle, what are their greatest qualities that you wish to imbibe in yourself?
I would love to have Mr Buffett's sense of humour and the ability to express in a sentence what others would take a few pages to explain.
A good investor zeroes in on what he thinks is going to be a good long-term growth story for a particular company/sector and tries to invest in it early. Sometimes, his vision does not pan out as expected. What does one do during that mental struggle when he is presented with new facts contrary to his beliefs? Can you point any of your own struggles with an investment thesis?
When the market price is not behaving as per your conviction, you should go over the argument over and over again; try and talk to people who have a contrary opinion and go through their arguments carefully. If there is a flaw in your earlier argument, then the opinion needs to change, otherwise you just dig in with increased confidence. This is ongoing and it keeps on happening every now and then.
Some of the key instances are: after being a non-believer in IT in mid 1990s, I turned a believer when there was evidence to the contrary, only to sell IT stocks in 1999 when the valuations became unjustified. After this, these stocks went up nearly 100% before finally correcting.
In 2006-07, we did not buy real estate stocks because any amount of research, meeting others did not offer convincing arguments in their favour, and recently.
There are times when equities trade at really low valuations (say 2008 or even December last year) and it becomes easy to tell the risk-return trade-off is extremely lucrative. Sometimes, individual stocks get hammered without much change in underlying fundamentals. Have you ever looked at a market and thought: what are the investors thinking?
It has happened on a few occasions in my career. In 2001 and in 2008. Fortunately on each of these occasions, we were able to stay focussed on long-term value. Consequently, we--through our commentaries/presentations--advised our clients to stay invested/increase equities allocation and the funds were also nearly completely invested.
What about December 2011? At the start of the year, where were you finding the most value from a sector standpoint with a long-term view? I know you were not very optimistic on broad valuations of pharma and consumer stocks.
For most of last year and even now, in my opinion, there is more value in banks, metals and in oil companies and relatively less in FMCG and in pharmaceuticals.
Your funds have grown in size. I won't ask the how-do-you-manage-liquidity question but do you think five years from now, you would wish you had a smaller fund that would allow you to be a bit more nimble or deliver better returns?
Liquidity in large funds is in many ways easier to handle as there is typically a large allocation to large caps and also the investor concentration is not there/less than in smaller funds. Regarding size, I try not to focus on things that are not in my control but want to give the best I can in any situation that I am in.
You generally stay away from cash calls, which can lead to bouts of underperformances, like in 2011. Is there any pressure during such short-term swings either from the fund company or investors?
Being part of HDFC Group is a great advantage. We also believe that it is very hard to time the markets. It is possible that over short periods funds that take cash calls may have a better performance, but over longer periods there is no such evidence.
We also believe that investors are doing asset allocation at their end and that they are investing in equities with a medium- to long-term view.
Finally, as someone expressed it very nicely, it is not the timing the market but the time in the market that really matters for equity investors.
Imagine an average, young investor with decent earnings and a good risk profile. What percentage should he be in equities considering India’s long-term growth story, provided he has a considerable long-term horizon?
This is very subjective and such answers are best given by financial advisors. I am a strong believer in the long term growth potential of India and of equities. Therefore one should invest as much as one can in equities guided by one's ability to tolerate volatility and capacity to remain invested for long periods. Contrary to popular perception, over long periods equity returns are not only higher but also more stable than long bonds.
Finally, the Sensex has returned 18% compounded over the past 30 years. Would you stick out your neck and say it can do an encore over the next 30?
It is a very long period, so one can get away with any answer. However, as I said, over long-term equity returns are higher and tend to be more stable than returns from long bonds. The icing on the cake is the tax free nature of equity returns.
Disclaimer: The views expressed by Prashant Jain, Executive Director and Chief Investment Officer of HDFC Asset Management Company Limited, constitute his views as of February 14, 2012. It should not be construed as investment advice to any party. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on his views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Neither HDFC Mutual Fund nor HDFC AMC nor any person connected with it accepts any liability arising from the use of this information. The information contained in this presentation is for general purposes only and is not an offer to sell or a solicitation to buy/sell any mutual fund units/securities. The recipient(s) before acting on any information herein should make his/their own investigation and seek appropriate professional advice and shall be fully responsible for the decisions taken. Mutual fund investments are subject to market risks, read the Offer Document carefully before investing.
