If you take stock of the 10- and 20-year return rankings of Indian equity funds, you'll find that the funds that top these rankings are very different from the ones that you find topping the charts on a yearly basis. In fact, some of the funds that are unexciting, middle-of-the-road performers on a yearly basis, magically climb to the top of the return charts in the long run.
The one unifying quality that these funds share has been their ability to contain NAV losses to their investors in the big market crashes - be it the dot-com crash of 2000-01, the infra bust of 2008-09 or the market correction of 2011. Curious how they did it? There are four broad strategies that were used by the funds which successfully defeated the bear over 10- or 20-year time frames. Here's the first one.
Being contrarian
Often, when a bull run has been on for some time, there's a mad rush to buy stocks in fancied sectors and hyped-up themes which have been delivering manifold gains. But when the cycle reverses and the inevitable correction begins, it is often the very same stocks that take the worst battering because of being overbought, over-owned and overvalued.
Therefore, one time-tested strategy to beat the bear and contain losses in a falling market is to hop off such overheated themes and sectors in a bull market, well before the tide turns.
HDFC Equity Fund and HDFC Top 200 Fund are two funds that have consistently figured at the top of the long-term rankings among Indian equity funds, with an 18-year CAGR of 20 per cent, handsomely beating the Nifty 50's 12 per cent. That is thanks to the fund house's ability to take contrarian calls right in the middle of raging bull markets.
Over three consecutive market cycles, HDFC Mutual Fund has identified overheated sectors and themes well ahead of the crowd and taken contrarian positions in undervalued sectors and themes before the next cycle begins. As Prashant Jain, the fund's CIO, once explained to Value Research, if one looks back at the history of Indian stock markets over the past 20-25 years, they have displayed six- to eight-year cycles. In each of these cycles, one or more sectors, piggybacking on some fanciful macro theme, took the lead to vastly outperform the market. In 1995 to 2000, the fancied sectors were IT, telecom and entertainment. In 2001 to 2007, the leadership shifted to infrastructure, capital goods and real estate. From 2008 to 2015, the baton passed to pharma and FMCG stocks. But if you happened to hold onto IT stocks post 2001, infra stocks post 2008 or pharma stocks after 2015, your portfolio would have been liberally splattered in red. The trick to avoiding the worst of the losses from such corrective phases was to get out of the overvalued sectors before they peaked out and to buy into the new leaders ahead of the pack.
Franklin Templeton is another fund houses which has managed to put its funds such as Franklin India Bluechip Fund, Prima Plus and Prima Fund at category- leading positions over the long term simply by avoiding momentum stocks and superheated themes in euphoric markets. These funds stayed away from realty and construction stocks during their stellar climb in 2006-07 and thus managed to contain their losses better than the peers in the crash of 2008.
But this strategy, while it looks good in hindsight, isn't easy to pursue and entails pain. If the fund manager exits the performing sectors too early, the fund can underperform the market or peers during the best of bull runs. HDFC Equity Fund lagged behind its category with a 36 per cent return in 2006, when peers managed 41 per cent, and went through a similar lag in 2013 and 2015. Franklin India Bluechip managed only a 47 per cent return in 2007, when the large-cap category delivered 52 per cent.
The lesson to investors is that if you're holding a seasoned fund that has scored big in the long term, ignore its underperformance of benchmark or category over a year or two, especially in a bull market.
We will publish the other strategies over the next few days.
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