In an interview with Outlook Money, Prashant Jain, CIO, HDFC Mutual Fund, shares his views on HDFC Equity the largest equity fund in India. Excerpts:
x What has made HDFC Equity the largest equity fund in India?
Several factors have made HDFC Equity—with assets under management (AUM) of about Rs.18, 000 crore—the largest equity fund in India. The prefix HDFC is a great advantage. That said, a consistent approach to investing with a long-term view, focus on quality, diversification across sectors and, avoiding assets for which the understanding is not sound have contributed to its growth. The fund has shown good and consistent investment performance across two decades spanning several market and economic cycles. It has successfully navigated the tech and the real estate booms and busts. The fund has outperformed in 18 out of its 20 years of existence with a CAGR of 21.2 per cent vs 10 per cent for CNX 500 since its inception in January 1995. To understand it better, Rs.10, 000 invested in January 1995 amounted to Rs.4.68 lakh on December 31, 2014 if invested in this fund as compared to Rs.68, 000 in the benchmark.
A very talented, experienced and stable investments team is responsible for this performance. Besides, support of the management, specifically in difficult times, has worked towards this fund’s performance.
x What factors changed the performance of this fund in the past one year with returns touching almost 60 per cent?
Over the years, we have followed a consistent approach to managing investments. Our focus is on quality, good understanding of underlying investments and, emphasis on valuations and diversification. These have been the cornerstones of our investment philosophy. This approach has worked well most of the time but sometimes, in extreme market conditions, it might not work for short periods.
Tapering fears and its aftermath impacted performance temporarily in 2013. As such, concerns receded. As normalcy returned to the market, performance has recovered. Specifically, overweight positions in banking, oil companies, select pharmaceutical companies and underweight positions in FMCG companies helped the fund in 2014.
It also needs to be highlighted that a one-year time frame is not sufficient to judge the performance of an equity fund. Equities are a long-term asset class, with long cycles (typically 5-10 years). Therefore, 3- 5- and 10-year periods for performance measurement are more appropriate than 1-2 year periods, in my opinion.
x What types of stocks never make it into this fund’s portfolio?
It is the belief of HDFC Mutual Fund that the key to creating wealth over the long term is avoiding big mistakes. The main feature of HDFC Equity Fund’s investment strategy has been to invest in good quality, sustainable businesses at reasonable valuations. It is essential to maintain this discipline in tough times and not succumb to pressure, in order to control risk. Risk control is as important to wealth creation as is generating returns. Hence, in the fund manager’s opinion, stocks that are below a certain threshold of sustainability and quality of business are the ones that will not make it into the fund portfolio.
