Kaustubh Belapurkar on Prashant Jain’s investment strategy & future of HDFC AMC

“Chirag Setalvad is an excellent bottom up stock picker and a large part of the strategies that he has traditionally applied have been with the mid and smallcap focus. But, his bottom up stock picking skills again are very well ingrained with the ethos of HDFC investing philosophy,” says Kaustubh Belapurkar, Director - Fund Research, Morningstar Investment Adviser.

Friday was a momentous day not only for HDFC AMC but also for the industry as a whole. A titan like Prashant Jain saying that he is splitting ways from the AMC that helped him make the name that he has made for himself. What are your reactions? One would have thought that he would have had several more years at the helm.
It is indeed a big breaking news. Prashant Jain’s name is synonymous with the way industry has grown by leaps and bounds over the last many decades and he has been one of the very well known, well regarded managers. It is almost like 2013, when Sachin decided to retire from national cricket.

Prashant, through his career, has really built a lot of value for investors through the strategies he managed but he has also built a very robust investment process with HDFC, working with a lot of other team members and we have been interacting with a lot of them very closely for the past many years. The good part is that he leaves it in extremely capable hands as he moves on.

What are the schemes that he currently manages and what is your experience with them? A lot of managers advised people to get into these schemes blindly because Prashant Jain was at the helm. So, give us a sense of the schemes that he managed?
The three marquee schemes that he has been very actively involved in and managing are the largecap equity fund, which is the HDFC Top 100; the erstwhile HDFC Equity Fund which is now the HDFC Flexi Cap and the erstwhile HDFC Prudence. It is now the HDFC Balanced Advantage Fund.

These are the three schemes that he did. The HDFC Prudence/BAF got extremely good track record of 28 years. From a global context, it is very rare to see a single manager managing the strategy for 28 years. When one thinks about the way he delivered value for investors since inception, obviously the BAF is in excess of about 17%, but over the last 10 years we are talking about 13% to 14% of CAGR across all of these strategies.

Remember the BAF is not even a pure equity scheme. It does take some fixed income exposure to reduce risk. The value that he has delivered is immense but we must acknowledge what has happened is that over the last few years, it has been a little challenging, especially during ‘19 and ‘20 and that was perfectly understandable given, the value investing philosophy that Prashant used to follow. He stuck to his guns and this is not the first time that he faced a patch where there was a significant underperformance for his schemes. It happened in the past also, just a few years ago, where he did go through underperformance, especially because of his PSU bank holdings.

But the focus was towards having valuations comfort. Picking his stocks earlier than the market paid dividends and we have seen how those schemes have come back since 2021, where values really come back to the fore. So the point that I am making is that if they have extremely well managed schemes and he has really created that sort of great value for the investors across the market cycle, obviously it would have been a little of a drag in 2019-20, but that is completely understandable.

That is an all-weather strategy considering that you saw largecaps outperform for quite a while. After that big downturn post the pandemic, we saw quite a few largecaps come to the fore. How would you describe the strategy that Prashant has brought to the table over the last couple of decades in the HDFC AMC funds?
Prashant has been a little bit of a sort of a contrarian so to speak. He looks for companies that he thinks are reasonably well managed and with good fundamentals but are going through tough times and he looks to identify them earlier. What has happened for him is that because of the earlier identification, sometimes he used to bear the pain for a little while before it could really bear fruit.

At the other end of the spectrum are companies or segments that he can potentially avoid and where he thinks the company is great, the growth is great but the valuation is just too expensive. There are more examples where he has trimmed or gotten out of these positions in the past – be it the infrastructure-led companies in 2007; in the more recent times, the way he pared his positions in NBFCs or some of the auto companies back in 2000 prior to sort of 2018 downturn because valuations had become very excessive.

It hurt him the short term but it paid rich dividends. So working with this valuation conscious bias, he is amongst one of the foremost contrarian value investors that have existed in the Indian market. While it may not play out in the short term, investors who have been patient and stuck on with these funds, have really reaped the dividends of that.

Prashant Jain and HDFC AMC have been synonymous. Therefore, one would assume that his team walks lock step in what he has tried to do over the past several years. What would you say about the man who is going to step into Prashant’s shoes – Chirag Setalvad? Investors that currently have their money in those schemes have to bear in mind that when somebody of the stature of Prashant leaves, there is a void and the investor has to then decide whether to keep their money in or to move it out?
Absolutely. I would say Chirag is an excellent bottom up stock picker and a large part of the strategies that he has traditionally applied have been with the mid and smallcap focus. But, his bottom up stock picking skills again are very well ingrained with the ethos of HDFC investing philosophy that I just explained.

Obviously, valuations in that segment can tend to be a little more excessive and so a little more flexible as compared to what Prashant would be on valuations or overvaluations. But given that Chirag has really been working so closely with Prashant for the last 15 plus years, I think he has been pretty well ingrained in the philosophy of the investing processes of really looking for what we would call companies with reasonable quality but at reasonable valuations. Also they are going to look at good quality management.

The other bottom bit is also the analyst team that supports them. They have been beefing up the team over the years and they have got some very experienced analysts. They have also hired a lot of senior analysts within the team over the last few years. While Chirag has been an old hand, the analysts have been there.

They have also added very experienced managers from outside in the last couple of years. They have had some exits from the fund manager side, people who wanted to make career progressions to other sorts of asset managers. But they have got equally good if not better managers in their fold.

Gopal Agarwal is a classic case, another very well known name in the industry with Mirae and Tata and DSP. Roshi Jain, is again an excellent fund manager that they have attracted over the last many years. Rahul Baijal joined recently from Sundaram. So overall while some of these managers are new, they bring in their elements. They all have the right ingredients and the process is pretty institutionalised. The research process is pretty well ingrained.

What will be interesting to see from an investor’s perspective, and this is just in terms of what we would like to see is which manager is going to be managing those particular three strategies that I outlined and whether there are going to be any tweaks or changes in the way the strategy was run from what I had just described in the previous few minutes.

So that is something I might just watch out for, not a point of concern. Sachin retired but then we had the Kohlis and the Sharmas to take over the mantle. I think it is a very similar situation. Excellent teams were already there in place, it is only being beefed up and I would urge investors to not really be perturbed or worried.

It is a big gap to fill. There is no denying it well Prashant has been synonymous with not just HDFC but for the industry, there are elements that give us a lot of comfort that everything seems to be there in place. The other comforting factor is Navneet Munot. In fact, the last big shift that happened was with Navneet who was the CIO at SBI moving to HDFC as the CEO. Navneet really changed the investing culture at SBI and reshaped the entire thing. He has been left was a legacy which is in good hands and I think we see that as a similar coverage and obviously like is said the additional comfort that Navneet brings with him a lot of investment expertise so they can always tap into that if required.