HDFC Balanced Advantage is an amalgamation of HDFC Growth and HDFC Prudence. The latter was managed as a balanced fund with roughly 75% of allocation maintained in equities across time periods.
Balanced Advantage was assigned a Gold rating and then downgraded to Silver.
One of the reasons is due to its re-categorization, which now makes it part of a new category and competes with a different peer set. The fund now has the liberty to move dynamically between equity and debt segments without any restrictions or limits. However, as per the fund house, this fund will largely follow the same investment pattern as earlier: invest around 75% of assets in equities and balance in debt instruments. But other funds from the category may run a fluid investment approach and have a different risk/reward profile. In such a scenario, the fund now has to compete with a different peer set and establish a superior track record over the long term.
A downgrade in the parent rating also came into play.
The portfolio construction
Prashant Jain ferrets out quality companies with robust business models, clean balance sheets, and competitive strengths. Though the bottom-up style is clearly integral to Jain’s investment style and more prominent, the top-down factors aren’t ignored either. Jain is valuation-conscious and freely uses relative and absolute valuation methods while picking stocks.
Jain takes a departure from his trademark investment style while constructing the equity component of the portfolio. Unlike his other funds, where large-cap bias is apparent, here he is willing to invest across market caps. For instance, in January 2013, 40% of assets were invested in small/mid-cap stocks. As of November 2018, it stood at 12.35%.
Though Jain tends to construct a relatively large portfolio, he does take concentrated bets, with the top 10 holdings hovering around 50% of the portfolio. These, 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.
Jain is more restrained while building the fixed-income portfolio. He doesn’t take credit bets in the conventional sense. For instance, in February 2018, roughly 15% of assets were invested in AA+ and lower-rated securities. However, closer scrutiny reveals that most of the securities were issued by government agencies, indicating better creditworthiness than what the ratings might suggest.
Similarly, for duration, 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.
The strategy is defined in a way that the fixed-income component provides stability to the portfolio while 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 impressively over the long term.
A long time at the helm
Prashant Jain is a skilled and experienced investor with one of the longest track records in the Indian mutual fund industry. He worked with Zurich India Mutual Fund and moved to HDFC Mutual Fund when the latter bought out the former. Jain has always managed HDFC Balanced Advantage.
Since it is rare to have the same fund manager at the helm of the same fund for over two decades, we looked overseas to check similar instances.
While the ride has not been smooth, and there have been bouts of underperformance, Jain’s performance is exemplary. But before investors fly off the handle, we quickly acknowledge that comparing and boxing heterogeneous countries into one asset class can be deemed as nonsensical since the equity risk premium also differs.
To blatantly state that Jain’s fund is much better is simply not true. An annualized return of 12% in a developed market is extremely impressive. The point we are simply seeking to make is that Prashant Jain has done a very commendable job when it comes to wealth creation.
We shall examine this data in more detail and attempt to look at the alpha generated over the benchmark in each case.
