Prashant Jain Quits… An Era Ends

In my nearly twenty-year tenure as a research professional, I have witnessed a host of changes in the mutual fund industry. However, among the few constants has been the presence of Prashant Jain at HDFC Mutual Fund. Jain likely holds the record for the longest manager tenure at the helm of an Indian fund. His exit from HDFC Mutual Fund came as a surprise. 

Despite his constancy, in recent times, Jain emerged as a polarizing figure in the industry. While many believed that he was past his prime, others had steadfast faith in his abilities. And for those who came in late, it was hard to figure out what the fuss about Prashant Jain was.

His research-driven investment approach, valuation consciousness, contrarian bent, and laser-like focus on the long-term, are well-documented. However, Jain will likely be best remembered for his willingness to stick to his conviction. 

Jain was willing to endure long periods of underperformance in pursuit of his conviction. When the latter paid-off, his funds would stage spectacular comebacks. Turnarounds like the ones in 2003, 2009, and 2014, cemented his position as first among equals, in the pantheon of portfolio managers.

Then again, conviction can be a double-edged sword. Admittedly, the last few years have been difficult. From 2017 through 2020, Jain’s funds delivered an indifferent showing. Their asset sizes shrunk, and risk-profiles worsened. As the sheen wore off, expectedly both Jain and his funds were severely panned by the mutual fund ecosystem.

And just when he was all but written off, Jain staged yet another comeback of sorts in 2021. Near-term showing suggests that his funds are topping their respective categories.

But there’s more to Jain’s portfolio manager credentials. 

An integral part of researching and rating mutual funds is expressing an unambiguous opinion. Sadly, a large number of portfolio managers are less-than adept at handling unfavorable views. Jain was an exception. He was always respectful of the analyst’s right to express critical views, even if he disagreed with them.

Jain’s conviction in his investment approach also shone through his personal investments. Even when it wasn’t mandatory to invest in or disclose manager investments, Jain invested millions of his personal monies in funds he ran.

Manager meetings are essential to fund research. Unlike some of his peers, Jain never had ‘no-go’ areas for interactions. 

Oddly my last interaction with Jain was some time ago when I bumped into him at an airport. Though we hadn’t met in years, Jain was quick to exchange pleasantries. He came across as the same affable person I knew, optimistic about the future of equities as ever.

His recent struggles notwithstanding, Jain made a sterling contribution to the mutual fund industry by lending it immense credibility. His exit undeniably marks the end of an era.

Go well Prashant!

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Of Sangakkara, Yuvraj, and Prashant Jain…

In the recent World T20 final, southpaw Kumar Sangakkara’s blistering knock helped Sri Lanka triumph over India. Playing his last international T20 match, Sangakkara had had a rather indifferent run coming into the final. But on the day, his batting display meant that all skepticism surrounding him vanished and the clichéd maxim “form is temporary, class is permanent” was back in circulation.

In the same match, another southpaw Yuvraj Singh had a bad day at the office. To put it mildly, he was woefully out of sorts with the bat. As a result, he found himself at the receiving end of a barrage of criticism; even as I write this post, critics are busy writing his cricketing career’s obituaries. Though Yuvraj has proven credentials as a match winner, not many seem willing to offer the “form is temporary …” defense in his favour, at present.

To my mind, the diverse reactions can be attributed to a recency bias. The accolades for Sangakkara and criticism for Yuvraj have more to do with their performance in the final match, rather than an accurate evaluation of their cricketing prowess. Both Sangakkara and Yuvraj are unquestionably talented batsmen with impressive careers to show for. But for now, most believe that Yuvraj is a 'has-been', while Sangakkara is a 'class act'. And what’s driving this belief—the players’ showing in the most recent match.

The recency bias can manifest itself in investments as well. If markets have been on an upswing in the recent past, investors are more likely to believe that they will continue to move northwards going forward as well, rather than otherwise. Likewise, a stock or sector which has hit a purple patch lately will often inspire more confidence in investors rather than one that has underperformed recently.

O Prashant, Where Art Thou?

In the latter part of 2013, I was addressing a gathering of mutual fund distributors, advisors and investors. Things became interesting when the conversation veered towards funds run by portfolio manager Prashant Jain i.e. HDFC Top 200 and HDFC Equity. To clarify, I thought (and continue to think) highly of those funds and the manager in question. But then, I was in a minority. The funds were having a terrible run in 2013, underperforming both their respective benchmark indices and comparable peers. The audience was at its vitriolic best: Theories such as the manager doesn’t churn the portfolios enough, the funds are too large to perform, and the manager is a spent-force were put forth by the audience to rationalise the underperformance.

Prashant Ahoy!

Oddly, at present (i.e. roughly six months later), Jain and his funds are being eulogized by the same set of distributors, advisors and investors. And what has changed between then and now–the funds have clocked a strong showing and emerged among the best performers in a peer-relative sense. Is that surprising? Not really. Broadly speaking, the manager has been betting on a turnaround for a while now and had positioned his portfolios accordingly. Expectedly, while the funds struggled for a better part of 2013, they staged a comeback of sorts in the present market upturn.

Is it Heads or Tails?

Here’s what makes the funds tick: Jain easily ranks among the best portfolio managers in the country; he plies a robust investment process and is backed by a fund house which has a reputation for safeguarding investors’ interests.

The aforementioned factors existed when the funds were underperforming, and they continue to be present now too, when the funds are outperforming. All things being equal, a year or so of underperformance doesn’t turn a good fund into an inferior one; likewise, outperformance over a six-month period doesn’t convert a mediocre fund into a superior fund.

Yet, we have seen the manager and his funds go from vilification to glorification in a six-month period. This is irrational behavior at its best which can be attributed to the recency bias. I shudder to think of the reactions that will follow, if Jain’s funds were to underperform over the ensuing six months.      

What investors must do

Resist succumbing to the recency bias while investing. Think about it: you might exit a sound investment avenue with solid long-term prospects because of short-term underperformance. Conversely, by blindly chasing an investment which has fared well you may run the risk of making an overpriced buy or even one that is unsuitable for you. Maintain a long-term orientation while investing; it will help you block out all the noise which prevails in the near-term.

Also, learn to look beyond just performance while making investment decisions. Rather focus on what makes the investment avenue tick to better understand when it is likely to fare well and otherwise. This in turn will help you make informed investment decisions, independent of recent performance.

On a lighter note, a word of caution for those writing off Yuvraj based on one poor showing—the humble pie isn’t particularly palatable!

HDFC Top 200: An underrated achiever

Did you know that even investments can be exciting? Typically, asset classes or investment avenues that have hit a purple patch make the grade as exciting ones. Especially, the ones that have gone from obscurity to prominence in a short time span. They are written about in the media and instantly recommended by investment advisors. For instance, a fund that has delivered a trail-blazing performance and is perched at the top of the rankings. Even providers of financial services enjoy their fifteen minutes of fame; say a fund house that holds the largest asset size in the industry. Don't get me wrong. There is nothing wrong with an asset class, an investment avenue or a financial service provider being lauded and discussed, because it has delivered. In fact, it's only to be expected.

The trouble starts when one reads too much into the 'exciting' bit and makes investment decisions based solely on the same. Also, since most of the fanfare can be attributed to a recent showing, it is difficult to distinguish a 'flash in the pan' from a 'sustainable' performance. And for serious investors, the latter is certainly a more important evaluation parameter.

Then there are funds which don't qualify as exciting ones. Make no mistake, that's not the same as being non-performers. On the contrary, these can be funds that go about playing their part to perfection, but in an understated manner. They often deliver with enviable levels of consistency. Their performance over longer time periods and across parameters can be impressive. Despite this, there is never a frenzy surrounding them. It is not uncommon for such funds to be labelled as 'boring'.

Sadly, most investors fail to realise that in the context of investing, boring can be good. This is because, boring translates into predictability. And predictability means fewer unpleasant surprises. If you are building an investment portfolio to achieve certain objectives, boring funds of the aforementioned variety should account for a lion's share of the portfolio. The fact that a fund isn't in the limelight or isn't perceived as exciting is no reflection on its prowess. A competent performer stays the same irrespective of the attention it garners. HDFC Top 200 Fund (HT2F) is one fund that falls in the category of underrated achievers.

Originally an offering from Zurich India Mutual Fund, the fund became a part of HDFC Mutual Fund subsequent to the former's takeover in 2003. A diversified equity fund, HT2F's investment proposition is quite simple. It largely invests in stocks of companies featuring in the BSE 200 index. An interesting aspect of the fund is that it combines the active and passive styles of investing. It holds around 60% of its portfolio in line with the BSE 200 index. The fund has also benefited from the presence of its fund manager, Prashant Jain (Executive Director & CIO-HDFC Mutual Fund). Incidentally, Prashant Jain was earlier associated with Zurich India Mutual Fund. The fund's long-standing association with the fund manager has served it well.

Now for the performance. For a fund that has been in existence for well over a decade (inception in 1996), HT2F's track record is impressive to say the least. As on July 14, 2009, over the 3-Yr and 5-Yr periods, it had delivered 17.5% CAGR and 31.2% CAGR respectively; the corresponding figures for BSE 200 were 9.9% CAGR and 21.8% CAGR. Over the last 12 months, the fund posted a growth of 22.3% vis-à-vis just 3.1% for its benchmark. HT2F's NAV rose by 21.6% CAGR over a 10-Yr period as compared to 13.8% for BSE 200. And that is no mean achievement!

Any analyst worth his salt will agree that a fund's mettle is truly tested during a downturn. In recent times, after peaking in January 2008, domestic stock markets went into a downward spiral that lasted until March 2009. Over this (approximately 14-Mth) period, between it highest and lowest points, the BSE 200 shed 64.9% on an absolute basis; HT2F scored over its benchmark by losing 54.8%. In effect, the fund has fared better than its benchmark in both the upturn and downturn. HT2F is no laggard when it comes to competing with peers. Its showing vis-à-vis comparable peers (funds that predominantly invest in the large cap segment) is equally noteworthy.

Despite this, there is no perceptible buzz around the fund. No one is raving about its performance. This is hard to explain. For some obscure reason, HT2F lacks the 'X' (read exciting) factor that is much needed to draw attention.

What investors must do
For one, it would help if you don't let the hype or 'lack of it' affect your investment decisions. Always remember, investing need not be exciting; conversely, as mentioned earlier, boring can be good. You must check with your investment advisor/financial planner if a competent and proven, yet seemingly humdrum fund fits in your scheme of things. And if it does, by all means get invested.

(NAV data sourced from www.hdfcfund.com; data for BSE 200 sourced from www.bseindia.com)