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Performance over Time Matters

Prashant Jain, Executive Director & Chief Investment Officer, HDFC Asset Management Company feels the primary objective of an active fund manger is to do better than the benchmark...

In the second part of this special interview, Prashant Jain, Executive Director & Chief Investment Officer, HDFC Asset Management Company, talks about the performance of the funds he manages.

Why are there so many equity funds from HDFC? Which of these would you like to close down?
This question would be better addressed to the MD. In my opinion, compared to our peers and to our size, we do not have too many funds. The number of NFOs that have been done by us is modest. What is more important in my opinion than the number of funds is how the funds have done. Generally, all our funds have added value over the benchmarks over the medium- to long-term period.

In the case of HDFC Prudence; investors were scared with the aggressive stance on equity allocation. What was the rationale for this? Have you done anything to address the concern?
In 2008, the markets went from one extreme in valuations to other in a very short time period. In my opinion, a 60 per cent fall in about a year was the fastest ever in the Indian markets. It was once in a lifetime kind of a situation and was a result of large institutions going bankrupt in the US and globally. My approach to investments has been to invest with a long-term view and to keep a balanced view of the markets. It is not based on extreme views of the markets or on very short-term views.
The fall in 2008 was so severe and fast that even the good quality stocks dropped substantially. While this did lead to high volatility in the short-run, we did not panic; we instead further improved the quality of the portfolio with a long-term view. This approach paid off handsomely as it has in the past. As of June 29, 2012, the HDFC Prudence has delivered a CAGR of nearly 20 per cent since its inception in 1994. Now, the NAV is around 30 per cent higher over the peak NAV of 2007, though the markets are down nearly 10 per cent in the same period.

HDFC Top 200 has slipped on our ratings. What went wrong?
The Value Research ratings mean a lot to me. I have always held you and your processes in high esteem, which are focused on the long-term with investor interest at its core. At the same time, in my opinion, ratings based on peer group performance alone have some deficiencies. If for a moment, all funds in the universe under-perform the benchmarks, the fund that underperforms the least would get the highest ratings. Excessive focus on peer group-based measurement of performance also leads to excessive risk-taking by funds as had happened in 1999 and 2007 which is detrimental to their long-term performance.
I feel that the primary objective of an active fund manger is to do better than the benchmark. Any fund that per annum delivers 2, 3 or 5 per cent better returns than the benchmark over medium- to long-term of say 3 or 5 years or longer periods is doing a good job and vice versa. This is particularly relevant to the Indian markets. Indian markets have been delivering nearly 15 per cent CAGR returns over long periods. While this in itself is an attractive return; funds that can better this by a reasonable margin make for compelling investments.
Coming back to the ratings of HDFC TOP 200, while the ratings may have slipped a little, but as long as we continue to do better than the benchmarks over 3 and 5 years timeframes, I would not be unduly worried. HDFC TOP 200 is also a Fund whose universe is limited to the BSE 200 stocks and there are limits on the divergence between the Fund and the benchmark. Thus, even though it may not be 100 per cent appropriate to compare this Fund with less constrained ones, we will endeavour to perform better over time as has indeed happened on quite a few occasions in the past.

Over the next 5-10 years what should one expect from HDFC Equity?
Let me start from the economy and the markets, as a significant portion of the total returns over long periods come from market performance. Despite the current pessimism in the markets and the challenges in the economy, in my opinion, unless we really mismanage, the economy in the current decade should grow faster than the last one. And, the markets should perform, in view of the prevailing below average PE multiples and prevailing peak interest rates.
Coming to HDFC Equity Fund, its positioning and investment strategy has remained unchanged for a long time. This is because the strategy of building a diversified portfolio of good quality with reasonably valued businesses to create wealth is as relevant today as it was in the past. Hopefully, following the same approach and discipline should lead to this Fund doing better than the benchmark as has been the case so far over medium- to long-term periods.

Your funds are among the largest in their respective categories — is it not a barrier to performance?
This debate of size and performance has been there for few years now. Please bear in mind that the size of mutual funds put together is miniscule compared to the markets and the economy. Even the largest fund is about 0.20 per cent of the overall market cap. Thus, there is no risk of being crowded in my opinion. If you classify all funds in order of performance, in my opinion, the larger funds have done better than the smaller funds consistently over medium to long periods. While large size is not an asset, sizes are not close to a point where they can start impacting performance, particularly against benchmarks, in my opinion.

How do you balance bottom-up stock picking and diversity of your portfolios?
Diversification is good, but over diversification dilutes long-term performance. We take care to remain diversified across key economic variables and sectors. But, at the same time we do not shy away from committing reasonably large amounts of capital behind good quality high conviction ideas.

When looking at the portfolio of HDFC Top 200 and HDFC Equity, there are several overlaps. Why is it so?
In large-cap funds, some portfolio overlap is inevitable. After all, there are only 50 or so large-cap companies. However, what people typically do is glance though the top 10 holdings of different funds, see very familiar and quite a few common names in them and conclude that the portfolios are similar. Some of the top holdings are indeed common and will remain so. The allocations could however be different and the non top-10 holdings may be different. A 20-40 per cent difference in portfolio composition is sufficient to make a reasonable difference to performance, particularly over long periods. For instance, an annual 2 per cent difference over 10 years will make a big difference to wealth.

What isyour view on gold as an investment?
I am not an expert on gold. And, even expert opinion is very divided on gold. I have few observations though; gold prices in real USD terms are close to all time high levels and gold is not supposed to create real wealth, it is only a reservoir of wealth. Investments by Indians in gold have multiplied almost 10 times in the past four years. It is never easy for the majority to make money in gold and in my view, a more cautious approach is warranted for investments in gold at current prices.

Where do you put your money?
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.

You have been a fund manager for two decades. Don’t you get bored?
Not yet. There are a few downsides to my job, but the good thing is that one learns everyday. Over time, as you keep learning, you experience more market cycles, which makes you better equipped to deal with the future.


To read Part 1 of this interview click here