Prashant Jain is one of the most well recognized and respected fund managers that the Indian mutual fund industry ever had.
He truly merited that position in more ways than one.
In terms of sheer assets, he reigned. His experience and tenure as a fund manager was impressive – one that spanned three decades. He was consistently at the helm of the funds he managed, starting at Zurich Mutual Fund which got taken over by HDFC Mutual Fund. Such consistency in leadership of a fund is rare. His adherence to his investment strategy, even if it meant being penalized by the market for a while, was viewed by some as stubborn, but eventually admirable.
Ultimately, his overarching objective to maximize investors’ return on investment was achieved over market cycles. Under Prashant, HDFC Flexi Cap delivered a CAGR of 20.90% (June 20, 2003 - July 29, 2022), against the peer group average of 18.43%.
So when the poster boy of the Indian fund industry decided to resign in July 2022, investors were perturbed.
Roshi Jain has big shoes to fill, but is no shrinking violet. We have been following her investment style for a while, and are positive on her research and managerial capabilities.
She launched her career at Franklin Templeton as a research analyst in May 2005. She moved on to co-manage funds and rose to prominence as the fund manager of Franklin India Focused Equity and Franklin India Bluechip Fund.
Bluechip was a great performer in 2015 and 2016 but then hit a rough patch. It was evident that the fund required a more aggressive approach, rather than the defensive one that no longer seemed to deliver in the large-cap space. Roshi took over the fund from Anand Radhakrishnan in June 2019. Her style paid off, and in 2021, the fund topped the charts. She exited the AMC in the last quarter of 2021 and joined HDFC Mutual Fund in December that year.
Let’s talk styles.
In certain aspects, Roshi and Prashant are startlingly identical. Both have a keen eye on valuations. And we don’t mean this in a superficial way, by simply evaluating a few metrics such as the P/B and P/E ratios.
While every serious investor evaluates the respective industry, the business cycle, and the position of the company within that industry, a valuation-conscious investor trains their guns on the intrinsic value of that company. This would entail analysing the cash flow trajectory, working capital requirements, cost of capital, key business value drivers, and capital expenditures that businesses need to make to generate value.
Consequently, a natural fallout of this style of investing is the bottom-up stock picking and buy-and-hold approach. In a similar vein, their famed contrarian stances are simply derivatives of their strategy.
If you remember, Prashant was pilloried for passing by technology stocks and focusing on old-economy stocks in the late 1990s. A brazen move, after all those who dared to do so saw their funds trail a market fueled by schizophrenic valuations. In 2007, he decided not to own real estate or power utilities but purchased FMCG, pharmaceuticals and automobiles. In 2018, his exposure to consumer cyclicals was almost negligible at 0.9%, compared to 10.7% of the benchmark and 11.5% being the category average. He was one of the few who anticipated a slowdown in the auto sector, at a time when the sector was performing well. The sector witnessed a significant slowdown in 2019.
Roshi was among the first managers in the industry who anticipated consolidation in the telecom sector and played that theme. Just as Prashant refused to attend the NBFC party in 2017, she too kept her distance. She never touched Yes Bank even when other fund managers at Franklin Templeton took exposure to the stock.
But Roshi is no carbon copy of Prashant.
Roshi has an aggressive investment style. She tilts towards a concentrated portfolio with high conviction holdings. As a result, one can spot significant overweight and underweight positions, be it sectors or stocks. For instance, in 2015, her exposure to communication services was 7.5%, when the category peers had no exposure at all to this sector. Similarly, in September 2021, she was significantly underweight in consumer cyclicals; a 2.2% exposure compared with 7.5% of the benchmark index (Franklin India High Growth Fund that was later repositioned as Franklin India Focused Equity).
As far as HDFC Flexi Cap goes, the number of stocks has decreased from 57 in June 2022 to 50 in April 2023.
Both ply a benchmark aware approach but are not benchmark clones. Having said that, Prashant would over index a theme. But Roshni, even if convicted, avoids doing so.
Prashant got a lot of brickbats for favouring PSUs. Roshi was the only manager in Franklin Templeton who dabbled in public sector companies. Yet, is cautious in her exposure to them.
While Prashant would sometimes inch towards deep value (his exposure to utilities and energy), Roshi never did. Roshi approaches sectors, and stocks within those sectors, that have a structural growth theme with growth visibility over the medium to long-term. Growth at a reasonable price (GARP) is more suited to her style.
What we really like is Roshi’s nimble approach. Yes, she is a long-term investor. Yes, she prefers a buy-and-hold strategy. Yes, her stock selection is typically strategic, rather than tactical. But she won’t hesitate to take corrective measures if the fundamentals are showing signs of weakening or diminishing growth visibility (her exit from Vodafone Idea is a case in point). She would rather opt out of such stocks and re-invest when they offer a better risk-reward profile.
Going ahead…
There is sufficient continuity in the investment strategy and the basic foundation of the portfolio.
Like Prashant, Roshi possesses the tenacity to withstand underperformance of her contra picks till the market acknowledges otherwise. Hence, gives her contrarian bets a long runway. This will be reflected in bouts of underperformance, but don’t mistake it for bad judgement.
The fund’s strategy is clearly GARP. Intensive research will continue to be the core of the investment approach, backed by the AMC’s competent investment team.
Investors in the fund need not worry.
HDFC Flexi Cap
