HDFC Equity and HDFC Top 100 had a good run until the first half of 2019.
Performance tripped in the second half, which eventually dented their long-term track record. As a result, over 5-year and 10-year time frames, the funds have been underperforming their respective benchmarks as well as category peers.
Is the downgrade because of the latest performance numbers? No.
In fact, I would like to point out that this is not the first time HDFC Equity and HDFC Top 100 have witnessed severe underperformance. There were periods in 2013 and 2015 as well. And I remember encountering severe criticism when I reiterated the Gold rating on both funds in 2015.
So what changes now? I see an enhanced risk to the strategy, which leads me to downgrade both to Silver.
Prashant Jain’s long-term investment approach, policy of staying fully invested, and backing his convictions when the strategy is out of favour, has often delivered pleasing results over the long term. But there are also periods when his valuation-conscious approach is out of favour.
Does that mean his approach is faulty?
On the contrary. The process is robust with research at its core. Prashant adopts a hands on approach to research, to get an in-depth understanding of the business and ferret out companies with robust business models, clean balance sheets, and competitive strengths. Though the bottom-up style is clearly integral to Jain’s investment style, the top-down isn’t ignored either.
Since relative and absolute valuation methods are used to pick stocks, his style can be described broadly as growth at a reasonable price.
Given his valuation-conscious approach, Jain increased exposure to segments which are attractively valued, such as financial services, utilities, energy and capital goods. This is consistent with his belief that after a massive sell-off, it’s value which outperforms. He continues to remain underweight on the consumer staples sector given high valuation, and the consumer discretionary space as he believes that COVID-19 will dent demand there. He trimmed exposure to consumer cyclicals to zero much before the segment witnessed a downturn.
The portfolios are poised to benefit from the turnaround in the economic environment, but will continue to witness challenges until the trend reverses. To add to it, his investments in public sector enterprises have not yielded desired results.
A point worth noting is that he has always highlighted the risk inherent to the NBFC segment and has avoided investing in it. To his credit, the events in the NBFC space played out as he anticipated.
HDFC Top 100
- Category: Equity Large Cap
- Category Index: S&P BSE 100
- Fund Benchmark Index: IISL Nifty 100
- Analyst Rating: Silver
- Star Rating: 2 stars
- Fund Manager: Prashant Jain
- Date of Analysis: June 2020
- Equity Holdings (May 2020): 50
- Top 6 holdings (May 2020): RIL, ICICI Bank, ITC, Infosys, HDFC Bank, L&T
For this fund, Prashant is clearly mindful of the benchmark as he targets having “matched stock positions” of at least 60%. Having said that, he doesn’t shy away from taking significant underweight/ overweight positions at the sector level when he spots opportunities. For instance, his top picks such as ICICI Bank, ITC, and Infosys are overweight versus the index.
HDFC Equity
- Category: Equity Multi Cap
- Category Index: S&P BSE 500
- Fund Benchmark Index: IISL Nifty 500
- Analyst Rating: Silver
- Star Rating: 2 stars
- Fund Manager: Prashant Jain
- Date of Analysis: June 2020
- Equity Holdings (May 2020): 44
- Top 6 holdings (May 2020): ICICI Bank, L&T, SBI, ITC, Infosys, RIL
Prashant isn’t benchmark-conscious while constructing the portfolio. However, when he fails to uncover enough stocks that can generate alpha or believes that valuations are stretched, he doesn’t shy away from aligning the portfolio with index. But that is not to suggest that he is a closet indexer. The portfolio’s top picks, such as ICICI Bank and SBI, are significantly overweight versus the index.
