Prashant Jain has been managing HDFC Balanced Advantage Fund for over 25 years. According to the Morningstar report, the fund has generated alpha at a CAGR of 9.54% since inception and 8.22% in the last 20 years. (The fund is benchmarked against S&P BSE Sensex since there was no relevant benchmark then). Globally, only two-fund managers Peter Lynch and Anthony Bolton have generated alpha of such high magnitude. While Lynch who managed Fidelity Magellan for 13 years between 1977 and 1990 generated alpha at a CAGR of 10.92%, Bolton managed Fidelity Special Situations between 1979 and 2007 and delivered alpha at CAGR of 9.20%. We spoke to Prashant Jain, ED and CIO, HDFC MF about his 25-year journey with the same fund.
This February, you have completed 25 years managing the HDFC Balanced Advantage fund (earlier known as HDFC Prudence fund), which is a record in India and a rare occurrence even globally. Tell us how it all started.
I started my career with SBI Caps after passing out from IIM Bangalore in 1991. My joining was delayed due to some personal reasons and I was the last one to join in my batch. Equity research was not a preferred career choice then. As luck would have it, I was assigned to the mutual fund division (SBI Mutual Fund was then a division of SBI Caps) in an equity research role. After few years, four of us (Sundaram, Chandresh, Swaminathan and me) moved from SBI Mutual Fund to set up 20th Century Mutual Fund. In January 1994, this Fund launched two schemes, namely, Centurion Prudence Fund and Centurion Quantum Growth Fund. In 1999, 20th Century Mutual Fund was acquired by Zurich Financial services and it was renamed Zurich India Mutual Fund. Centurion Prudence Fund that I was managing, was also renamed Zurich India Prudence Fund. Finally, in 2003, HDFC Mutual Fund acquired Zurich India Mutual Fund and thus, Zurich India Prudence Fund eventually became HDFC Prudence Fund. The same Fund was merged with HDFC Growth Fund and was renamed HDFC Balanced Advantage Fund as a result of the reclassification of mutual fund schemes proposed by SEBI some time back.
Over the last 25 years, what has remained the same about your job and what has changed? How has your approach evolved?
A lot has changed on the surface but the core remains the same- both in the markets and in a fund manager’s job.
Way back then, there were no daily NAVs, peer group performance was not tracked closely, industry size and competitive pressures were less, media focus was missing, there was no online prices or trading, information was hard to come by and companies were reluctant to meet. All this and more has changed.
The Core however remains the same - markets both then and now continue to be driven by news flow and sentiment in the short run, beating the benchmarks was not easy then and it is more difficult now, the key to a good investment then was and even now is understanding a business well, not to over pay and patience.
Over time, as one has made and learned from mistakes, the job should have become easier, but in my opinion, it has not. In fact, portfolios used to be less benchmarked then compared to now, a trend which I think is here to stay.
If we were to define your style, what would characterise it best – value, growth, blend, momentum or freestyle? Why?
Blend is an apt description, with a bias towards value. My preference is to invest in a growing business at a reasonable price and hold them for medium to long periods.
There is a general expectation that equity funds could deliver 15% returns over next 15 years. Though we have seen such growth in the past, we all know that past performance does not indicate future returns. In such a scenario, what would be the reasonable return expectation from equity funds over the next 15 years?
Most equity / equity oriented funds have indeed delivered returns between 12- 20% CAGR over last 15-20 years. However, even way back, when faced with this question, my answer used to be that returns should be in line with nominal GDP growth with some outperformance hopefully. That answer still remains the same.
In fact, it is harder to forecast returns now than compared to the past. This is because India is a more open economy now; global happenings thus matter more. Technological change is accelerating and business models are getting disrupted more than ever. This again makes forecasting difficult.
Finally, as information has become easily and widely available, as the number of players has multiplied and as institutional ownership of markets continues to rise, beating the benchmarks is likely to become increasingly challenging. Excess returns or alpha is typically generated when markets misprice a security and someone participates in it. Such instances may become less frequent for reasons mentioned above.
However, it is reasonable to expect that equities should deliver higher returns than fixed income investments over medium to long time horizons. To the extent that interest rates are in high single / low double digits in India, a 12-16% CAGR market return appears to be a reasonable estimate.
For the first time, in 2018, a majority of active fund managers in India struggled to beat their benchmark – do you think this herald a new era where most active Indian fund managers like their US peers will fail to deliver alpha.
While HDFC’s funds are in my opinion faring well, it is true that the last year or so has been challenging for active managers. There are two key reasons for this in my judgement. Firstly, Index performance has been led by few index heavyweights on one hand and mid and small cap stocks have corrected sharply on the other. Secondly, with the introduction of the total return index (TRI), which considers dividend as part of returns, beating the benchmarks has become tougher.
In my judgement, it is reasonable to suggest that the 4-8% CAGR alpha that good funds have delivered over the last two or more decades and the underperformance of the last year are extremes and the performance in foreseeable future of active managers in general will be somewhere in between.
In your experience, how important is the role of luck in fund management?
In my opinion, one should neither deny the role of luck nor underestimate the importance of effort. In my career too, luck/ destiny has played an important role. Whether it was joining the mutual fund division in SBI Caps or HDFC MF acquiring Zurich India Mutual fund, luck had its role and without it life would have been quite different. One way of reconciling the role of luck and effort is to believe that luck is likely to favour the brave more.
Prashant you have put your own money in the funds that you are managing. Why have you never thought of diversifying your money across other asset classes and managers?
It is true that right through my career I have invested nearly all my savings in equities and for close to two decades only through equity funds of HDFC Mutual Fund.
My asset allocation to equities has been high as I have been a believer in India & in the compounding potential of equities and my tolerance for volatility is high. In this journey of now close to three decades, I have experienced severe downturns in equity markets more than once, but have not regretted staying invested right through. The fact that I have always had a stable job and that my needs were modest also helped.
The issue of not diversifying across asset managers was simpler to address. One, I feel that returns across reasonable well managed diversified funds will be close to each other and second, it just did not seem right to trust someone else with my money and still expect others to trust me with theirs.
I do not however recommend this approach for others. In my judgement a sound investment plan comprises of three simple steps:
1. Asset allocation towards equities should be a function of individual risk appetite and should be carefully assessed from a long term perspective. While equities are a rewarding asset class in the long term, over short to medium periods they are risky and uncertain. Hence, only that portion of wealth that one can set aside for next 3 to 5 years atleast and on which one can tolerate volatility, both emotionally and financially, should ideally be invested in equities. The rest should be invested in safer asset classes.
2. Diversify across few managers that have a good track record.
3. Patience. The longer one holds equity funds, the more wealth should get created in general
Why did you never think of changing your job?
It is not that this thought never crossed my mind. However, on reflection, each time, I concluded that if I have to do the same work, if learning is going to be same, and if one is being treated fairly, then why change. I have been fortunate to have worked with seniors who accepted mistakes and periods of underperformance, who were fair and gave me higher responsibilities over time.
What are the two most memorable moments in your career?
I was extremely lucky to have joined the mutual fund industry in its infancy. This was also the time when Indian economy was beginning to open up. As a result I have had a most exciting career - challenging at times, but always full of learning.
One memorable moment was joining 20th Century Mutual Fund and launching two funds, one of which is even today managed by me. Being a start up, I was involved in number of activities right from writing and designing offer documents, getting them printed, distributing them, travelling extensively across the country and meeting distributors etc.
Another memorable but a most difficult moment was the tech bubble in 1999-2000. As our funds were underweight tech stocks, I had sleepless nights due to underperformance for few months, which resulted in our funds being at the bottom of the league table. However, when the tech bubble busted, we recovered lost ground.
The turning point in my career, I feel was the acquisition of Zurich Indian Mutual Fund by HDFC Mutual Fund. This catapulted the business and the careers to a level that was hard to imagine.
Your favourite pass time?
I like reading books in my leisure time. Apart from that I like meeting friends, watching movies and travelling with family and friends. In fact, I am a quite a movie enthusiast and my favourite movies are Deewar, Sholay and Dangal.
