Chief Investment Officers (CIOs) or star fund managers bidding goodbye to an AMC, or even the MF industry, has become a commonplace occurrence in India. The recent bull market has seen many well-known fund managers, from Kenneth Andrade of IDFC to Sunil Singhania of Nippon quit their MFs to seek greener pastures in managing PMS schemes or AIFs.
But the announcement by HDFC AMC’s CIO Prashant Jain (referred to as PJ here) that he was seeking to resign has triggered an outpouring of emotional tributes not only from the media, but also from many of his peers. Nilesh Shah of Kotak AMC has likened him to cricketing legend Don Bradman and AMCs from DSP to WhiteOak have bid him a fond farewell on social media.
If you’re a relatively recent mutual fund investor, you may wonder what all the fuss is about. Investors in HDFC funds may want to know what they should expect.
Here’s an attempt to explain what PJ brought to the table at HDFC AMC and what could change as he hangs up his boots.
What he contributed
Stability and continuity
If you’re an Indian mutual fund investor, a big challenge you face is to find a fund with an unbroken 10-year record under a single fund manager. Fund manager churn picks up in bull markets, with MF managers cashing on a good 5 year or 7-year record to either switch AMCs or start PMSs or AIFs that pay a fatter fee. If you check the equity funds in operation today, you’d find that a majority have undergone a manager change within the last 5 years. This makes it difficult to gauge if the fund’s track record is owed to the current manager or his predecessor.
With PJ-managed funds such as HDFC Balanced Advantage (earlier HDFC Prudence, which was then merged into HDFC Growth but continued to adopt the strategy of HDFC Prudence), HDFC Flexicap (HDFC Equity) and HDFC Top 100 (HDFC Top 200), there is no such dilemma. Prashant Jain has managed these funds since their inception in the mid-nineties, and their spells of both outperformance and underperformance are clearly attributable to him. In fact, PJ is the rare fund manager in the Indian MF industry who’s stayed more loyal to his investors than the AMC sponsors!
HDFC Equity and HDFC Prudence owe their beginnings to 20th Century Mutual Fund in the nineties, when PJ managed them. When the fund was acquired by Zurich AMC, PJ moved to Head of Equities. When Zurich was taken over by HDFC AMC in 2003, PJ again moved with his funds and has helmed their equities team since then. His unswerving oversight of the funds under his watch has helped investors enjoy a rare continuity of style and strategy for over two decades.
PJ’s steadfastly GARP style of investing has helped his funds create immense wealth for Indian investors over extended periods of 25 plus years, with CAGRs that rival the Buffetts and Lynches of the world. (If you want to know more about the various investment styles fund managers follow, read this article).
Globally, fund managers such as Warren Buffett, Peter Lynch or Stanley Druckenmiller are admired for their ability to deliver market-beating returns over multiple market cycles and not just 5 or 10 years. The track record of a fund manager across multiple cycles is critical because the styles and the sectors that ace one bull market seldom outperform in the next. Yet, long term results for MF investors depend on it staying ahead in every new cycle.
Many Indian funds and their star managers who shone bright in the dotcom boom of 1997-2000 saw their portfolios crash and burn in the bear market that followed it. They couldn’t participate in the bull phase from 2003 to 2007 because it was led wholly by commodity, cyclical, capital goods and real estate stocks. Fund managers who aced the 2003-2008 capex driven boom suffered big reverses in the bear market that followed. Many didn’t make it back in the 2014-2022 period, because investing in financials, consumer, IT or chemical stocks was never their forte.
Living through bear markets that wipe out 50% plus of your portfolio value and having to rebuild it from scratch when markets undergo a tectonic shift is no easy task. To portfolio managers who survive this, it offers a lot of learnings. What’s more, the Indian market was until the turn of the millennium quite susceptible to scams with both Harshad Mehta and Ketan Parekh teaching investors seminal lessons on the perils of following the herd.
PJ’s 28-year stint managing Indian MFs right from the mid-80s (where he started at SBI MF) forced him to live through not just one or two, but over four such cycles in which markets boomed led by some sectors, followed by a big crash, with a new set of sectors leading a new bull phase. Each bull phase also offered him a front row seat to how scamsters operate.
Having learnt hard lessons in the crashes of the early nineties, PJ turned adept early on in his career, at spotting over-heated sectors and operator-driven stocks. This shaped his staunchly contrarian style of investing and helped him avoid accidents by spotting market bubbles early.
The funds managed by him were the rare ones in India to not own concentrated positions in ICE stocks when the dotcom bubble burst in 2000 and to stay off real estate stocks when the capex bubble popped in 2008. This helped his funds contain losses much better than peers in the big crashes that followed. Apart from spotting overvalued sectors, PJ also proved adroit in 2002 and 2009, in loading up on the sectors that would lead the next bull market.
The above history explains why the funds managed by PJ, which display a patchy record against their benchmarks from year to year, have still managed impressive CAGRs since inception. This interview I did with him a few years ago illustrate this investment style.
This contrarian streak however proved to be PJ’s undoing between 2017 and 2020, when ‘quality’ stocks from sectors such as retail banks and NBFCs, consumer and IT turned market darlings. While PJ opted to move out of these sectors into the cheaply valued corporate banks, cyclicals, PSUs et al in 2017-18, the market (driven by central bank liquidity) showed no signs of either correcting or turning away from its quality obsession. This led to sharp underperformance of PJ-managed HDFC funds of both benchmark and peers in this entire period.
In the last one year, with the easy money draining out of global markets, markets have turned more valuation-conscious, PJ’s funds such as Flexicap, Top 100 and Balanced Advantage have made a tentative comeback to beat benchmarks. But a continued winning streak is needed for these funds to restore faith in long-term performance.
Stubborn contrarian streak
If PJ’s extra-long stint in the Indian equities market gave him the ability to stay many steps ahead of market reversals, it also vested him with unusually high conviction that his stock and sector bets would work. Where other fund managers, if their contrarian positions weren’t working, would bow to market preferences and correct their positions, PJ would stick steadfastly to his bets, often ignoring the fact that this led to his funds trailing benchmarks or peers. It is this stubborn streak that was behind his most recent spell of underperformance, dragging down the 3 and 5-year records of the schemes.
PJ was well aware of this shortcoming of his. As he told N Mahalakshmi in an interview in 2001: “There is a very thin line between being early and being wrong, and I have learnt it the hard way many times over”. PJ’s conviction however did extend to his personal investments and he ate his own cooking. Much of his personal equity allocation over the years is parked with HDFC funds managed by him. While other fund managers at HDFC AMC are less rigid adherents of the contrarian or value styles, it is quite likely that PJ’s oversight as CIO did leave its stamp on their sector and stock choices as well.
Given that average holding periods of investors in Indian equity funds are at no more than 4-5 years, it is likely that investors who’ve entered PJ’s funds in recent years have experienced sub-par returns from their holdings that lagged peers and benchmarks.
However, iconic fund managers often attract investors who are willing to stick with them through spells of under-performance. PJ’s position as CIO of HDFC AMC certainly endowed not just the funds he managed, but all HDFC equity schemes with a certain immunity from pullouts even when they were middling performers. That PJ’s assets under management grew steadily over the years to top Rs 1 lakh crore at the time of his exit, despite a patchy record from 2017 to 2021, go to demonstrate this cult status.
What will change
To make CIO exits more palatable, Indian AMCs often talk about their water-tight investment processes that will see their equity funds march on irrespective of manager changes. But the truth is that fund managers, especially ones like PJ, do leave an indelible stamp on the schemes they manage. What does the immediate future hold for HDFC MF investors, now that PJ has retired?
HDFC AMC appears to have been aware of PJ’s exit plans for over a year now and has added a strong line-up of seasoned fund managers from other AMCs. With fund managers for all the PJ managed schemes already announced last week (they are set to take over from July 29), investors won’t endure much uncertainty about the transition. The following are the changes and what they mean.
# 1 Chirag Setalvad who has managed HDFC Midcap Opportunities and HDFC Smallcap for over 20 years and has worked closely with PJ, is set to take over as CIO- Equities of HDFC MF. Investors in Mid-cap Opportunities and Smallcap can therefore see minimal upheavals from this transition.
# 2 Roshi Jain, a senior fund manager with 17 years of equity experience who was earlier with Franklin Templeton is set to take over as manager of HDFC Flexicap. She is a valuation-oriented growth style manager. In any case, the Rs 26,500 crore AUM of this fund will ensure that she can’t stray too far away from the large-cap favouring contrarian style of investing. It would be quite tough for a flexicap fund of this size to alter its market cap mix or chase momentum stocks, given the likely impact costs. This may ensure that the Flexicap portfolio or strategy doesn’t see dramatic churn post PJ’s exit. But it remains to be seen if she continues with PJ’s excessively contrarian and underperforming stock bets such as PFC, REC or BPCL.
# 3 Gopal Agarwal, formerly Head of Equities at Mirae AMC, comes with a 19-year stint in Indian equities and excels at reading macros and commodity cycles and translating them into timely sector bets at the portfolio level. He’s set to manage the equity portion of HDFC Balanced Advantage Fund, which again is a Goliath with over Rs 43000 crore AUM. Given his skills at macros, this fund could adopt a more dynamic asset allocation strategy akin to other funds in this category post the shift.
It is presently managed as a fixed-allocation, aggressive equity fund. Gopal also favours a GARP style of investing rather than a contrarian or deep-value one, which could entail stock specific changes in the equity portfolio. The fund’s debt portfolio has always been conservatively managed and that could continue with Anil Bamboli.
# 4 Rahul Baijal, earlier with Sundaram MF, comes with a 17-year stint in equities, and is credited with turning around Sundaram’s focussed large-cap fund. He is set to take over as manager of HDFC Top 100 Fund. As large cap funds such as Top 100 necessarily have to pick from a limited pool of stocks, there’s limited wiggle room to change sector weights or style, but a very staunch contrarian style may be replaced by GARP. The fund’s size (over Rs 19,900 crore) could make a concentrated strategy, Baijal’s strength, more difficult to pull off.
None of the above managers may match the length of PJ’s 28-year tenure in the Indian markets, but they have still witnessed 2-3 market cycles. It must also be noted that none of the above managers have been rolling stones and have spent long years at their previous stints, suggesting that they could lend continuity to HDFC’s equities team.
There’s an old adage that other plants find it difficult to grow under a banyan tree. When a CIO of PJ’s repute and conviction leads the equity team of an AMC, his investing style and convictions about stocks and sectors do tend to overshadow what other, less seasoned managers may think (even if they are right). With PJ’s strong value and contrarian orientation, there was always the suspicion that HDFC AMC was a one-trick pony that had limited ability to ace other investing styles such as quality, momentum, quant or even passives.
PJ’s exit, with the induction of new faces, may allow HDFC AMC to strike out and explore more passive funds and non-contrarian styles. PJ also did not believe in tactical asset allocation, cash calls or timing calls, which have preserved value and lifted long-term records for other AMCs such as ICICI Prudential. His exit may pave the way for HDFC funds to re-examine their aversion to such tactical calls. HDFC Balanced Advantage could morph from a fixed allocation aggressive equity fund to a dynamically managed fund that more closely compares to peers in the category.
Focus on short term results
With PJ loyalists no longer likely to give the fund house a long rope in underperformance, HDFC AMC and its funds are likely to face greater pressure to deliver. The exit, in 2020, of HDFC AMC’s CEO Milind Barve who gave PJ and his team a completely free hand in style and strategy choices, and the entry of Navneet Munot, earlier CIO at SBI MF, is likely to speed this transition.
Less AUM challenge
The flows that star managers attract to their schemes often carry the seeds of their downfall (Fidelity Magellan Fund managed by Peter Lynch was an example) with the funds becoming too unwieldy to manage and their size dictating their market cap preferences and investing style. PJ’s exit may not see outflows from HDFC AMC given the planned transition, but incremental flows will certainly be harder to attract, given the recent record and without the presence of the iconic manager. This may actually prove a blessing in disguise as the funds will have time to build a record under their new managers, before they attract incremental AUM.
Note: At PrimeInvestor, our calls in Prime Funds and the MF Review Tool are based on a fund’s consistency (short-term and long-term), fund strategy and portfolio. However, as investors, you may not have the luxury of waiting for years on end for performance to pick up and nor can we demand that you do. The risk of opportunity loss is also present. Therefore we balance short-term underperformance that a fund can recover from and which may not excessively harm your returns and severe prolonged underperformance that can genuinely drag your portfolio, when giving our calls.