In an exclusive interview with Cafemutual, Prashant Jain, Executive
Director & Chief Investment Officer, HDFC Mutual Fund talks about his
journey in fund management, the challenges faced by him and more.
You have been managing HDFC
Prudence Fund for 21 years now. What were the biggest challenges faced by you
in managing this fund?
I have
never focused on challenges but simply on doing my best, each day, one day at a
time. When I look back, I feel, staying focused on the long term, has been a
challenge at times, given the overwhelming day to day noise and the pressures
of short term performance. Explaining the several advantages of balanced funds
i.e., ongoing and automatic portfolio rebalancing and tax efficiency of the
fixed income portion has not been easy. Even today there are several who are
yet to be convinced.
However,
the most talked about challenge – fund size, I am yet to feel it.
What has helped you build
this impressive track record? How do you plan to sustain it?
It has
been great to be associated with HDFC Prudence Fund right through from
inception in Feb 1994 till date. The Fund has delivered 20.4% CAGR over ~21
years and has turned Rs. 10 to Rs 482* (Adjusted NAV as on 31st December,
2014). When I started my career, I had only read Einstein on compounding, but
now I have actually experienced it. If this can be repeated for next 20 years,
then the outcome will be very interesting and the fund will be closer to what
Mr. Buffett has done.
We will continue to do exactly what we have
done so far – invest with a long term view, ignore noise and short term
performance pressures, give the fund our best every day and hope for a good
outcome.
In the
last 22 years of your fund management career, which mistake would you have
liked to avoid? What have been your notable mistakes?
There are two types of mistakes in investing:
· buying a poor quality / loss making investment
· missing a great investment
Regarding type 1 mistakes, I made lots of them in the first few years of
my career (when the AUMs used to be in double digits) and the learnings of that
period have been with me throughout.
Regarding type 2 mistakes, I have to learn more as I keep on committing
these even today. Not having invested to our capacity or for long enough in stocks
viz. Sun Pharma, Asian Paints, HDFC, Hero Honda etc over last 10 years or so
fall in this category*.
*Stocks
referred above are not recommended by HDFC Mutual Fund / HDFC AMC. The Fund may
or may not have any present or future positions in these stocks.
How do
you deal with information overload?
By staying focussed, by delegating to the team
and encouraging the team to stay focussed, by thinking long term and through
good understanding of businesses.
Do you
invest your own money in the funds managed by you?
Nearly all my savings are in equity funds of
HDFC Mutual Fund. It should however be noted that investments should be
tailored to one’s specific needs and that there is no single approach that is
suitable for all.
Unlike
in the west, Indian funds are able to generate alpha by outperforming their
benchmarks. Do you think Indian fund managers will continue to find
opportunities to beat markets in future?
Indian mutual funds own just 2.5% of the
markets. This and the focus, experience, maturity of the mutual fund investment
teams has made it possible to take performance from other market participants –
retail and other institutional players.
I am optimistic about the ability of the mutual
funds to continue to add value in the foreseeable future.
I would suggest that investors should take full
advantage of the tax benefits, strengths and experience of mutual funds by
making mutual funds the preferred vehicle for managing their equity and fixed
income investments.
What
would you consider to be a reasonable expected rate of return from equity for
the next 10-15 years?
Given the increasing pace of change in the
world, long term forecasts are not very helpful.
Outlook for Indian economy and Indian equities
is promising. It has been observed that equity returns of a country are closely
linked to nominal GDP growth rates over long periods. Over last few decades,
nominal GDP growth (real growth + inflation) has been around 15% CAGR and that
matches nicely with equity returns of S&P BSE Sensex.
India is one of the best placed among large
economies in the world in terms of demographics, demand, growth etc in my
opinion. India is a key beneficiary of lower crude oil prices. The savings from
lower oil prices are near 2% of GDP on run rate basis at current oil prices
over calendar year 2013 average.
Apart from lower oil prices, a strong, growth
oriented and business friendly government bodes well for economic growth and
for businesses. Key decisions of new government so far give confidence that
lower fiscal deficit is a priority and it should continue to fall. The government
has shown with its actions that it will prioritize quality of supply of
essential things like electricity etc. over the price of supply; put in place a
transparent framework so that India can harness potential of its vast mineral
resources; simplify tax structures and improve tax compliance; and follow
policies that will aim to lead healthy and sustainable economic growth.
From an equity market perspective, current P/E
multiples of equity markets are reasonable – actually below long term averages (Chart
1). However, corporate earnings are expected to be better than estimates as
corporate margins are significantly below the long term averages and should
improve as capacity utilization and business conditions improve (Chart 2).
There is thus room for multiples to expand as growth improves and as interest
rates move lower besides strong earnings growth.
To summarize, the outlook for equities is
promising from a 3-5 year view.
How
important is the role of luck in investing according to you?
Luck / destiny has a role to play not just in
investing but in life itself. However, the extent to which one attributes
success or failure to luck/destiny is a matter of individual choice &
personal belief. I believe that luck/destiny has an important role but hard
work improves one’s chances of being lucky & successful.
Which
are the 5 most important skills to be a successful fund manager?
Hard work, lots of common sense, ability to
work in a team, belief in the ability of the markets to correctly price an asset
over the long term and at times to some extent luck / destiny all have a role
to play. There are several individuals who have done well in HDFC AMC and in
the industry. In my opinion all of us owe this success to not just the factors
mentioned above, but in large measure to the support of the teams of which we
are a part of and of the sell side analysts as well.
Whom
do you look up to in the field of investment management?
I have read up on Warren Buffet and John Bogle
and believe I have learned a lot from them, but I don’t follow anybody in
particular. For all practical purposes, I prefer on-the-ground research: meet
companies and look for disparities and try to identify winners among them. However,
I would love to have Mr Buffett's sense of humour and the ability to express in
a sentence what others take a few pages to explain.
Did
you always want to become a fund manager?
No, not at all. In fact, this is destiny. I was introduced to equities and to investing as I was the last person in my batch to join SBI Mutual Fund due to some personal commitments and equity research was least preferred between project appraisals, marketing, merchant banking etc, hence I had to “settle” for equity research!
