As Prashant Jain, the Chief Investment Officer of HDFC Mutual Fund announced his resignation last week, an unusual number of money managers and veteran investors paid tributes to him. Jain is one of the rare Indian fund managers to complete a near three-decade stint in the mutual fund industry, 19 years of which were spent with HDFC AMC.
What seems to have taken many retail investors by surprise is the returns he’s generated on his funds over his career. Jain has not been among the star managers of the recent bull phase whose investment moves have been admired or closely copied. The funds managed by him have underperformed the Nifty500 in four of the last six years and figure in middling positions on fund ranking platforms, carrying 2- or 3-star ratings.
But there can be little doubt that Jain has created immense wealth for investors who stayed the course with his funds. HDFC Top 100 Fund (HDFC Top 200 Fund in its earlier avatar) launched in October 1996, has managed an 18.8 per cent CAGR since inception. HDFC Balanced Advantage (HDFC Prudence Fund) has delivered a 17.9 per cent CAGR since 1994. HDFC Flexicap (HDFC Equity Fund) has served up an 18.3 per cent CAGR from 1995. A sum of ₹1 lakh invested in these funds 20 years ago would be worth anywhere between ₹36 lakh and ₹50 lakh today.
These are the kind of returns that most of us struggle to achieve in our equity portfolios. So what are the personal investing lessons we can draw from Prashant Jain’s stellar returns?
Many retail investors believe that identifying fast-moving stocks and betting big money on them, is the route to wealth creation. But the track record of Jain’s funds tells us that there’s another equally critical aspect – avoiding losses.
Consider conservative investor A, who only bought boring large-cap stocks in 2017 and made a 12 per cent CAGR on his ₹10 lakh portfolio over the next four years to 2021. After a 15 per cent decline in 2022, he’d be left with ₹13.37 lakh. Aggressive investor B, who believes in owning block-busters, managed to buy stocks that earned a 20 per cent CAGR from 2017 to 2021, but suffered a 40 per cent draw-down in 2022. He would be left with a lower ₹ 12.44 lakh. Though this is just simple arithmetic, it is not intuitive to most folks. If your goal is to maximise long-term equity returns, avoiding big draw-downs at the portfolio level is more important than owning high-return stocks.
His ability to side-step big draw-downs was a standout aspect of Jain’s career. Though his funds seldom topped the charts in any year, he could spot over-heated sectors ahead of the market and position his funds to minimise losses when bear phases hit. Having started his career in the mid-eighties, Jain lived through over four market cycles, which gave him opportunity to observe that sectors that are blue-eyed boys in one bull market seldom survive the reversal that comes after. In the 1998-2000 dotcom boom, HDFC funds were among the few to shift out of concentrated positions in ICE stocks ahead of the bubble burst. In 2007-08, they avoided fancied real estate stocks which later crashed and burned. Containing losses on his funds to much lower levels than the market and his peers, was key to the HDFC funds’ impressive long-term returns.
Good as he was at spotting over-heated markets, Jain was not a believer in timing it through cash calls and always remained fully invested. This helped his funds actively participate in the big bull phases that unfolded after each crash.
Many retail investors think that the secret to wealth creation lies in identifying pieces of coal likely to turn into diamonds. They sink all their time and effort into researching the next sunrise sector or microcap stock that can transform into the next Asian Paints. But focusing too much on the growth potential of a business can blind-side you to the macro, sector, governance or regulatory risks that can trip up the business, and tempt you to overpay for it. Jain gave a margin of safety on valuations as much weight as business potential, when buying stocks.
Having seen first-hand many bear markets and scams, Jain was sceptical of narratives that bid up stocks to unsustainable valuations, always weighing the merits of a business against the price paid for it. It was this ability to think differently from the consensus, that helped him turn sceptical of IT stocks at 3-digit PEs or real estate stocks valued based on land banks. In the recent bull market, he has skipped expensive quality names from the NBFC, consumer or chemical sectors in favour of beaten-down corporate banks, cyclicals and PSUs. These contrarian stock picks led to his funds trailing the indices from 2018 to 2021. But with the central bank-driven liquidity bubble popping, there’s recent evidence that his value-conscious style of investing is coming back, with his funds seeing a turnaround.
Sticking to a style
Many investors when building a stock portfolio don’t have a clear idea of what they’re aiming for. Nor do they have a preferred investment style. They may start out buying high growth stocks in a bull market, add high dividend yield names in a bear phase, accumulate MNCs with high cash flows in a volatile phase and punt on penny stocks for quick gains.
But this hodgepodge approach can leave you with a portfolio that neither delivers capital appreciation nor income. Different styles of investing tend to work well in different market phases and it is extremely difficult to predict when a style will work. Constantly switching lanes on your style and investing objectives, leads to missed opportunities that cost you dear in the long run. Jain’s GARP (growth at a reasonable price) style of investing delivered long-term results because of his ability to stick to it through many market cycles.
Ignore short-term setbacks
Comparing their personal portfolios to the index or their peers every quarter or year, many investors worry about underperforming them. But equities don’t deliver returns in a linear fashion.
Pick any multi-bagger stock of the past decade and you’d find that its returns have been quite lumpy. An investor who bought Deepak Nitrite in June 2014 at about ₹100 (adjusted price), would have seen the stock flat-line for the next two-and-a-half years to reach just ₹110 by February 2017. But as earnings picked up in 2019, markets took notice of the chemicals company to sharply re-rate it to over ₹500 by June 2020. It went on to scale a peak of over ₹2,800 by October 2021 and has since lost 30 per cent to trade at ₹1,700 now. There were many years in the past decade when this stock trailed the Nifty500, but only investors who stayed with it through such phases would have enjoyed its 60 per cent CAGR.
In recent years, Jain has received a lot of flak for his funds trailing benchmarks in quarterly, yearly and 3-year rankings. Selling off winners early in a bull market and owning stocks nobody wants to touch, isn’t an easy style to follow when managing other people’s money. But following a preferred style without worrying about others judging you, is something that you can easily do while managing your own money. While it may be a good investing practise to benchmark your portfolio’s performance, it important not to over-react to your portfolio’s spells of short-term underperformance against the markets or peers, as long as your companies are delivering on earnings and your investment thesis is on track. Over-obsession with beating others can distract you from the real purpose of your investing journey, which is to earn a Prashant Jain-like return in the long run.