After a less-than-average showing in the first three quarters of 2013, HDFC Equity and HDFC Top 200 have put up some better numbers over the last two quarters.
Fund manager Prashant Jain follows the growth-at-reasonable-price approach when picking stocks, commonly referred to as GARP. While a lot of asset managers employ this technique, Jain stands out for a variety of factors. A long-term, research-oriented approach is central to his investing style.
So it should come as no surprise when he invests in stocks that he believes are well-positioned for long-term growth. Neither should one be taken aback when he sticks to his convictions even if the market is punishing him for his stance. He did not get carried away by the tech bubble in the late 1990s which peaked early 2000. Ditto with the more recent run up in real estate and infrastructure stocks in 2007. Last year, our analyst noted how he stuck to his conviction to back State Bank of India.
Similarly, he does not flee to cash and believes in staying fully invested which could lead to an underperformance when compared with peers who get their cash calls right.
What worked, what did not
In 2013, given the expensive valuations in defensives, primarily the consumer staples sector, Jain reduced his exposure which hit the performance of both funds. Instead, he gravitated towards the sensitive sectors – industrials, communication services and primarily energy and information technology. Exposure to these sectors moved up from 30% to touch 40% in HDFC Top 200 and 43% in HDFC Equity.
In both funds, he maintained his exposure to public sector banks such as State Bank of India, Bank of Baroda and Punjab National Bank given their undemanding valuations.
The underweight exposure to consumer staples has now aided performance as valuations finally seem to have caught up with most of the companies in the sector. On the other hand, the increase in exposure to information technology has worked extremely well with the depreciation of the rupee and improvement in the global economic environment.
Banking – another sector where Jain had maintained a positive view despite concerns of rising non-performing assets, or NPAs, also recovered with the possibility of economic recovery. L&T and other industrial companies whose fortunes are tied to economic strength have also delivered a strong performance.
Reliance Industries, which started an upward descent after prolonged period of decline, was a notable addition to HDFC Equity last year. HDFC Top 200 saw exposure to this stock move up over a year from 1.75% to 5.10% by February 2014.
All these factors have aided performance.
Advice to investors
On a closing note, I would like to advice investors to invest in equity funds purely as a long-term strategy and never buy funds based on a short-term run-up in its numbers. On the flip side, however good a fund, it will hit a rough patch. That does not mean investors need to fret and jump ship.
The analyst rating at Morningstar is not a market call but reflects the analyst's conviction in the fund's ability to outperform its peer group and/or relevant benchmark on a risk-adjusted basis over the long term. Both HDFC Equity and HDFC Top 200 have a ‘Gold Analyst Rating’ which reflects the analyst’s confidence in the solidity of these offerings. And despite hitting a rough patch in 2013, our conviction has not wavered.
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