What do you look for in a company? We hear you like to speak to people across positions and levels to get a company’s insight.
I prefer to invest in companies which have a track record and sustainable businesses. I avoid unproven business models for two reasons. One, I do not have full confidence in my ability to reliably forecast the prospects of a business with no/limited track record. Two, unproven business models are more suited for private equity format—they need different skill sets and investment horizons compared with mutual funds (MFs). The focus is to understand a business model—drivers, risks, strengths, weaknesses and so on. Typically, it is not possible to understand all of these in one meeting. So, the effort is to meet business leaders, competitors, unlisted companies, other private equity investors, analysts, to name a few. If you understand the business well, forecasting is relatively easy.
Prashant Jain, executive director & chief investment officer, HDFC Asset Management Co Ltd
Your exposure to the pharmaceuticals, FMCG and media sectors is on the higher side. What is the rationale for this?
I am very positive on India’s economic growth prospects but not so clear about the prospects of the global economy. By and large, I prefer domestic-oriented businesses like consumer products, pharmaceuticals, media, banking, engineering and construction over global cyclicals. The recent rally in industrial commodities is more driven by investment demand due to low interest rates and is hard to justify by demand-supply or cost of production parameters. Its sustainability is suspected. That’s why we have considerable exposure to FMCG, pharmaceuticals, media and banking, all of which are linked to the growth of the Indian economy. One exception to the above argument is IT due to its business model of lowering costs for clients.
You do not take aggressive cash positions.
Correct. We expect investors to do the asset allocation at their end. One investor may invest 20% in equities and another 70%. The asset allocation for equity fund is fairly narrowly defined. Second, and more important, it is not possible to reliably time the markets, particularly over short time periods. An expensive market can become more expensive, like in 1991-92, and again in 1999-2000, when technology stocks first went from expensive to very expensive and then to unrealistic limits before crashing and more recently in 2007. The same applies for cheap markets. Markets were below 14,000 in 2008, but they went all the way down to 8,000. If funds are in cash and markets go up substantially, an investor can rightfully feel upset if he has invested in equity funds with a long-term view. This hurt a number of funds last year.
Do you think passive funds work in a country like India?
In the past, a fair number of active funds added significant value over the index. There are several funds that have delivered 20%-plus per annum returns over 5, 10 and 15 years, nearly 10% per annum higher than the benchmarks. Clearly, active funds have worked. This was possibly because of the strong performance of the economy and companies, and low ownership of markets by MFs and talented teams. But, if and when the markets are substantially owned by MFs, it will become difficult to outperform the market. To understand this, imagine a market owned 100% by MFs. In such a situation, since the funds collectively form the market, one fund can outperform only if another one underperforms to a corresponding extent. Besides, all of them incur some expenses. This is what is happening in the West. But even in those markets, there are some funds/investors who continue to outperform. The ones who are able to do so are invariably disciplined long-term investors. Such a situation is still some time away as the ownership of MFs in Indian markets is still low at close to 5%.