Being an allocation fund, the investment strategy entails making investments in both equity and debt instruments in the proportion of 75% and 25%. The strategy is defined in a way that the fixed-income component provides stability to the portfolio, whereas the equity component drives the performance over the long haul. With Jain’s proven stock-picking skills on the equity side, and a benign fixed-income strategy, the process can deliver pleasing long-term results.
- Category: Moderate Allocation
- Fund Manager: Prashant Jain
- Investment Style: Large Blend
- Credit Quality: High
- Interest Rate Sensitivity: Moderate
- Index: CRISIL Hybrid 35+65 – Agg TR
- Analyst Rating: Gold
- Star Rating: 4 stars
- Fund Analyst: Himanshu Srivastava
- Date of Analysis: March 2018
The fixed income portfolio
Jain doesn’t take credit bets in the conventional sense and focusses on investing in good quality securities where he has high conviction. As of February 2018, roughly 15% of assets were invested in AA+ and lower-rated securities. However, closer scrutiny reveals that most of the securities are issued by government agencies, indicating better creditworthiness than what the ratings might suggest.
As far as duration goes, he adopts a strategic approach (by forming a long-term view on interest rates) and doesn’t take tactical bets based on short-term news flows. He gradually reduced the fund’s average maturity from 18.18 years in January 2015 to the current 5.55 years and avoided making sporadic changes.
The equity portfolio
Jain adopts a research intensive approach and ferrets out quality companies with robust business models, clean balance sheets, and competitive strengths. When it comes to stock picking, he uses relative and absolute valuation methods while picking stocks.
Unlike his other funds wherein the large-cap bias is apparent, Jain departs from his trademark investment style by his willingness to invest across market caps. For instance, in January 2013, 40% of assets were invested in small/mid-cap stocks. But, as their valuations surged, Jain shifted his focus towards large caps, which as of February 2018 accounted for 57% of assets.
Though Jain tends to construct a relatively large portfolio (with 125-130 securities), he does take concentrated bets with the top-10 holdings accounting for 45%-50% of assets as against 35%-40% for the category.
The performance
Under Jain (June 2003-January 2018), the fund has clocked annualized growth of 21%, thus outperforming the category average (17%) by a huge margin. It is also noteworthy that it outperformed all its category peers on the returns and risk-adjusted returns front during this period.
Nonetheless, in 2013 and 2015, it delivered fourth quartile performance as Jain’s investments in PSU banks faced severe headwinds over NPA issues.
Having said that, the fund managed to make a remarkable comeback in the following years delivering top-quartile performance in 2014, 2016, and 2017. Therefore, despite intermittent hiccups, it managed to record second-quartile performance over 3- and 5-year periods as of February 28, 2018.
What to keep in mind
The concentrated equity bets, coupled with his willingness to back his convictions even in testing times, could expose the fund to above-average volatility compared with peers when faced with challenges. The years 2013 and 2015 remind us of bouts of short-term underperformance.
This year, too, the fund is going through a rough patch as the banking sector (particularly public-sector banks), which is the largest holding in the portfolio, is going through a rough patch.
The sharp swings in the fund’s return pattern in the recent times had adversely affected its risk return matrix. Over a 5-year period, while the fund’s standard deviation of 15.1% is higher than the category average of 10.8%, its Sharpe ratio of 0.86 is lower than peers' (0.99). Hence, the manager must do significantly more to commensurately compensate investors for the risk taken.
You can access more details on the portfolio and performance here.
