HDFC Asset Management

About

HDFC AMC is one of India’s largest mutual fund managers with USD 54 dollars in assets under management as on 31 March, 2021. Started in 1999, it was set up as a joint venture between Housing Development Finance Corporation Limited (“HDFC”) and Standard Life Investments Limited (“SLI”). During FY18-19 it carried out an initial public offering, and became a publicly listed company in August 2018. Currently, 26.1% of the company is owned by the public.

Sponsor of HDFC AMC,  HDFC Group owns 52.7% stake and  is  a  financial conglomerate, with presence in housing finance, banking, life and non-life insurance, asset management, real estate funds and education finance. HDFC Ltd is one of India’s leading housing finance companies and our majority shareholder.

Standard Life Investments (SLI) owns 21.2% stake in HDFC AMC. It is a  subsidiary of Standard Life Aberdeen plc group which is one of the world’s largest investment companies and was created in 2017 from the merger of Standard Life plc and Aberdeen Asset Management PLC. Operating under the brand Aberdeen Standard Investments, the investment arm manages $643.3bn (as at 31st December 2018) of assets, making it the largest active manager in the UK and one of the largest in Europe.

Key performance indicators 

Profit after tax 

PAT had increased to USD 173 million at 24.89 % 5-year CAGR for the financial year ended on 31st March,2020.

(source: hdfcmf.com)

Assets Under Management

AUM had increased to USD 43.76 billion at 16.21 % 5-year CAGR for the financial year ended on 31st March,2020.

(source: hdfcmf.com)

Expenses, operating margin

Operating margin had increased from 37 % in the YE FY19 to 41% in YE FY20. 

PAT increased by 36 % YOY for the financial year ended 31st march 2020.

Total expenses decreased by 32 % YOY  with 91 % YOY decrease in fees and commissions.

(source: hdfcmf.com)

https://files.hdfcfund.com/s3fs-public/2020-06/HDFC%20AMC%20-%20Annual%20Report%202019-20.pdf

https://files.hdfcfund.com/s3fs-public/2020-05/Shareholders%20Presentation%20Q4FY20%20-%20SV.pdf

Key staff

Prashant Jain  – Prashant Jain is the Chief Investment Officer at HDFC AMC. He started his career as a fund in-charge at SBI Mutual Fund in 1991. After this, he moved to Zurich Asset Management Company (India) Private Ltd. to become the chief investment office, head of funds management, and fund manager in 1993. He joined HDFC Asset Management Company Ltd. as the head of equities in 200.. He became the chief investment officer, executive director, and fund manager in 2004. Prashant Jain owns a B.Tech degree from the Indian Institute of Technology, Kanpur and a PGDM degree from the Indian Institute of Management, Bangalore. He is also a Chartered Financial Analyst (CFA) from AIMR.

Navneet Munot – Naveneet Munot is the MD and CEO of HDFC AMC effective from February 16, 2021. Prior to this, he worked with SBI Funds Management Pvt. Ltd. as an Executive Director and CIO and was a key member of the executive committee since December 2008. He started his career in 1994 with Aditya Birla Group. He moved to Morgan Stanley Investment Management in 2007 as an executive director and head of multi-strategy boutique and then joined SBI Funds Management Pvt Ltd. in December 2008. Presently, he is the Chairman of the board of Indian Association of Investment Professionals (CFA society, India). He has a Masters degree in Accountancy and Statistics and is a qualified CA. He is also a charter holder of CFA Institute and CAIA Institute and done Financial Risk Management (FRM).

Investment Philosophy (for firm)

Equity oriented schemes

Investment philosophy of the firm  for equity-oriented investments is based on the belief that over time stock prices reflect their intrinsic values. Investments in equities are driven by fundamental research with a medium to long-term view. Their  research efforts are predominantly focussed on bottom up research keeping in mind the economic outlook and macro-economic conditions. The focus of research effort is on understanding the businesses, key drivers and understanding the risks taking into account both quantitative (growth prospects, key variables, analysis of P&L statements, Balance Sheet and cash flows etc.) and qualitative (management quality, corporate governance, track record, competitive advantage, feedback from dealers, customers & experts etc.) factors. 

Debt Schemes

Investments in fixed income securities are guided by the investment philosophy of safety, liquidity and returns (SLR), generally in that order. Given the limited liquidity of fixed income markets in India, the firm  believes focus on liquidity, especially in open ended schemes is of paramount importance. Fixed income schemes invest in debt securities including government securities, non-convertible debentures, corporate bonds, asset-backed securities, money market instruments, etc. All investments are done in line with the scheme information documents (SID) and in permitted instruments. The credit risk assessment framework lays emphasis on four Cs of credit – character of management, capacity to pay, collateral pledged to secure debt and covenants of debt, wherever applicable. Further, the firm has an internal framework to determine absolute and relative investment exposure limits for individual credits. Apart from quality and credit research, the firm  aims to add value in fixed income investments by managing duration of portfolios driven by it’s view on interest rates and yield curve etc.

  • 2020
  • Invest profitable- The single most important factor that drives HDFC Mutual Fund is its belief to give the investor the chance to profitably invest in the financial market, without constantly worrying about the market swings.
  • Research & Analysis- To realize this belief, HDFC Mutual Fund has set up the infrastructure required to conduct all the fundamental research and back it up with effective analysis.
  • Controlled Risk- Our strong emphasis on managing and controlling portfolio risk avoids chasing the latest “fads” and trends.
  • We believe, that, by giving the investor long-term benefits, we have to constantly review the markets for new trends, to identify new growth sectors and share this knowledge with our investors in the form of product offerings. We have come up with various products across asset and risk categories to enable investors to invest in line with their investment objectives and risk taking capacity.

Media

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Prashant Jain’s style of investment has been the same for the past twenty years, he has always focused on buying good businesses at reasonable prices. He believes that markets are imperfect in the short run but nearly perfect in the long run so he looks for the opportunities that market offers and takes a long term perspective. In his view, the divide between growth and value is not very clear, the key is to figure out the long-term growth rate. Hence, his style can be termed as “growth at a reasonable price”.

He is not fixated on the fact that superior or faster growth can only come from smaller companies and it is also not even all about rapid growth. It is about the price for the growth that the business has, even buying a slow-growing business if offered at lower value is reasonable. In his opinion, there are two mistakes that an investor makes-

  1. Buying a weak business and losing money- either buying an unsustainable business or grossly overpaying for a business.
  2. Missing a good business opportunity.

He thinks that for making a buy,sell or hold decision on a stock, only the present price should be considered. He considers the idea to  look at past cost while weighing whether to buy or sell illogical. For him, returns from equities are a factor of earnings growth and dividend together and one has to be sure about the long-term growth prospects of the economy and improvements in corporate profitability. As per his observation, returns from equities mimic economic growth in nominal terms over long periods and this is the only reason for equities having a high compounding potential.

How HDFC MF’s Prashant Jain filters signal from noise, Bloomberg Quint, 25 November 2019

On avoiding confirmation bias: they specifically look for sell-side analysts who have an opposite  view to the firm’s analysts. They document the belief that they have about the business  and discuss it within the team and then look at the sell-side if they can improve their understanding.Their aim in speaking with sell-side analysts in general is to get a deeper understanding of a specific industry or business or situation and not to judge or measure their evaluation.They will listen to many, but eventually, put it all together to come up with their decisions.

On filtering noise: to get the best ideas from noise of 50-60 recommendations submitted by the sell-side firms, they ask the research house to present their top 3 ideas for the quarter and then  a part of commissions are distributed among the sell-side firms objectively based on the five best ideas submitted to them during a year (buy as well as sell). The evaluation criteria are also shared transparently.

On process vs person: he believes that good processes can improve certainty of average outcomes. However, exceptional outcomes are still dependent on people in this industry. They have a small team of 12-14 analysts in equities, they give utmost significance to the experience and therefore  analysts are not rotated across sectors. The firm invests in enriching the skills, experiences and keeping analysts motivated.

On being asked about how he takes the popular belief about him to be contrarian, he said that they’re not contrarian investors per se,  they look at underlying value and how it will evolve and sometimes, that can be a contrarian view. But they’ve often held positions that are also consensus positions – such as IT for a long time but when they believe that the valuations are unsustainable they might turn out to be contrarian.

On the size of a mutual fund: he thinks that the performance is not dependent on the size but instead it depends upon the choice of decisions that are undertaken.

Topic/Title- Alpha is generated when market misprices a security and one recognizes & participates in it: Prashant Jain, Media platform name-Café Mutual Date-2019

https://cafemutual.com/news/industry/16217-alpha-is-generated-when-market-misprices-a-security-and-one-recognizes-participates-in-it-prashant-jain

Prashant Jain has been managing HDFC Balanced Advantage Fund for over 25 years. According to the Morningstar report, the fund has generated alpha at a CAGR of 9.54% since inception and 8.22% in the last 20 years

Over the last 25 years, what has remained the same about your job and what has changed? How has your approach evolved?

A lot has changed on the surface but the core remains the same- both in the markets and in a fund manager’s job.

Way back then, there were no daily NAVs, peer group performance was  not tracked closely, industry size and competitive pressures were less, media focus was missing,  there was no online prices or trading, information was hard to come by and companies were reluctant to meet. All this and more has changed.

The Core however remains the same – markets both then and now continue to be driven by news flow and sentiment in the short run,  beating the benchmarks was not easy then and it is more difficult now, the key to a good investment then was and even now is understanding a business well, not to over pay and patience.

Over time, as one has made and learned from mistakes, the job should have become easier, but in my opinion, it has not. In fact, portfolios used to be less benchmarked then compared to now, a trend which I think is here to stay.

If we were to define your style, what would characterise it best – value, growth, blend, momentum or freestyle? Why?

Blend is an apt description, with a bias towards value. My preference is to invest in a growing business at a reasonable price and hold them for medium to long periods.

There is a general expectation that equity funds could deliver 15% returns over next 15 years. Though we have seen such growth in the past, we all know that past performance does not indicate future returns. In such a scenario, what would be the reasonable return expectation from equity funds over the next 15 years?

Most equity / equity oriented funds have indeed delivered returns between 12- 20% CAGR over last 15-20 years. However, even way back, when faced with this question, my answer used to be that returns should be in line with nominal GDP growth with some outperformance hopefully. That answer still remains the same.

In fact, it is harder to forecast returns now than compared to the past. This is because India is a more open economy now; global happenings thus matter more. Technological change is accelerating and business models are getting disrupted more than ever. This again makes forecasting difficult.

Finally, as information has become easily and widely available, as the number of players has multiplied and as institutional ownership of markets continues to rise, beating the benchmarks is likely to become increasingly challenging. Excess returns or alpha is typically generated when markets misprice a security and someone participates in it. Such instances may become less frequent for reasons mentioned above.

Interview with Prashant Jain – extract from book ‘Brightest Investment Minds’ by Anuj Shah

However, it is reasonable to expect that equities should deliver higher returns than fixed income investments over medium to long time horizons. To the extent that interest rates are in high single / low double digits in India, a 12-16% CAGR market return appears to be a reasonable estimate.

For the first time, in 2018, a majority of active fund managers in India struggled to beat their benchmark – do you think this herald a new era where most active Indian fund managers like their US peers will fail to deliver alpha.

While HDFC’s funds are in my opinion faring well, it is true that the last year or so has been challenging for active managers. There are two key reasons for this in my judgement. Firstly, Index performance has been led by few index heavyweights on one hand and mid and small cap stocks have corrected sharply on the other. Secondly, with the introduction of the total return index (TRI), which considers dividend as part of returns, beating the benchmarks has become tougher.

In my judgement, it is reasonable to suggest that the 4-8% CAGR alpha that good funds have delivered over the last two or more decades and the underperformance of the last year are extremes and the performance in foreseeable future of active managers in general will be somewhere in between.

Prashant you have put your own money in the funds that you are managing. Why have you never thought of diversifying your money across other asset classes and managers?

It is true that right through my career I have invested nearly all my savings in equities and for close to two decades only through equity funds of HDFC Mutual Fund.

My asset allocation to equities has been high as I have been a believer in India & in the compounding potential of equities and my tolerance for volatility is high. In this journey of now close to three decades, I have experienced severe downturns in equity markets more than once, but have not regretted staying invested right through. The fact that I have always had a stable job and that my needs were modest also helped.

The issue of not diversifying across asset managers was simpler to address. One, I feel that returns across reasonable well managed diversified funds  will be close to each other and  second, it just did not seem right to trust someone else with my money and still expect others to trust me with theirs.

I do not however recommend this approach for others. In my judgement a sound investment plan comprises of three simple steps:

1. Asset allocation towards equities should be a function of individual risk appetite and should be carefully assessed from a long term perspective. While equities are a rewarding asset class in the long term, over short to medium periods they are risky and uncertain. Hence, only that portion of wealth that one can set aside for next 3 to 5 years atleast and on which one can tolerate volatility, both emotionally and financially, should ideally be invested in equities. The rest should be invested in safer asset classes.

2. Diversify across few managers that have a good track record.

3. Patience. The longer one holds equity funds, the more wealth should get created in general.

Topic/Title- Prashant Jain of HDFC Mutual Fund shares his “Investment Mantra” Media platform name- ET now Date- 2018

There are two views one of the John C Bogle supporting indexing, and Warren Buffet supporting active management. In US mutual fund account for 50% of the market, therefore it is not possible to outperform the market. But in India mutual fund account for only 5% of the market, and market are always creating excesses, creating opportunity therefore with long term discipline and elementary valuations, you can outperform the market. Equities are exposed with systematic risk which can be reduced by longer holding period. Mutual funds diversify non systematic risk.

Topic- Prashant Jain Media platform- Café Mutual Date-2018

https://www.youtube.com/watch?v=wgyjyrijlPM

There are two views one of the John C Bogle supporting indexing, and Warren Buffet supporting active management. Market creates imperfections, excesses, mispricing from time to time. This results in periodic overvaluation / undervaluation across businesses and sectors. Mispricing is a result of either short term focus of market participants or improper understanding of fundamentals especially future outlook. This creates an opportunity for someone who is focused on long term and correctly understands a business. 

Topic/Title- Prashant Jain, HDFC AMC’s EC & CIO  Media platform name,- ET Now Date- 2017

https://www.youtube.com/watch?v=SEYb03p9YWo

One year returns are extremely hard to forecasts. CAGR of nominal GDP for last 10 years has been 12.1% and NIFTY CAGR has been 6% only, market cap/ GDP has fallen to low levels. 

Prashant Jain on his stock picking strategy, NDTV, 06 April 2016

In the interview Prashant Jain talks about his investment philosophy, he has a balanced view on  picking a company, he looks for growth under a reasonable price in a stock. He believes that the businesses with sustainable growth also have inherent competitive advantage in the long run. 

He talks about the idea generation process of the firm for picking stocks.They have a  large team which do sectoral research and look for the companies which are not covered before. They select stocks from a universe of 350-400 stocks which approximately represent 90 percent of the market capitalization. The decision of selection is left upon the individual  portfolio managers. For evaluating stock they look for minimum reasonable quality and  consider  two things – 

  • Business quality- In this they evaluate sustainability and look for inherent competitive advantage.
  • Business management- competence and integrity of management is looked upon and assessed on the basis of financial track record and the general opinion about them in the industry. 

He thinks there is a high correlation between business quality and management and both go hand in hand. On being asked the parameters that they use to assess the above two factors in the business, he said for evaluating sustainability, return on capital employed more than 15 percent over a long term is quite enough as  it also would  reflect the competitive advantage of the business. He thinks that  there is no such minimum threshold on it as more often it is a subjective view of the person. He thinks that management assessment is also subjective but the Board of Directors and dividend track record of the company can be considered.

In his view, value investing could be painful in the short to medium term( 3 – 5 years). He focuses on long term and thinks extrapolation of short term growth to long period is not a right thing to do and the good value is found in the segments  which are ignored when majority of the market participants are focused on a particular segment.

In the firm the decision to sell is left upon the individual managers and generally they sell out a stock when either of the two things happen, business becomes expensive and does not offer value or when some of the other businesses are giving meaningful return over the long term.

Topic/Title- 03 CIO Presentations Prashant Jain, CIO, HDFC Mutual Fund Media platform name- Café mutual Date-2014

https://www.youtube.com/watch?v=8otgSXJCv4s

Prashant says invest in equities with low P/ E, whenever P/E < 15 in India next 3-5 years return have been very encouraging. He says majority can never be right and majority can never be rich, he asks to go against the majority.

Analyst questions

  1. What factors do you think have helped HDFC AMC Ltd in achieving good growth in AUM and PAT over the year? 
  2. For FY2020, there has been a 91% YOY decrease in the fees and commission expenses, what are the underlying factors responsible for such a significant change?
  3. How does the firm approach risk management?
  4. Where does the firm add value to research provided by the sell side firms?
  5. How is the bonus of the fund managers decided, especially when the scheme managed by them either underperforms than the benchmark or the peer schemes in the market? 
  6. In selecting stock from the universe, how the weights given to different factors to be included in the portfolio are decided? Is it an individual call of the fund manager or is there any discussion policy that the firm has?
  7. How much keeping the same investment style over the years has helped you ? 
  8. What factors would you attribute to the underperformance of some major funds like HDFC Top 100 Fund, HDFC Flexi Cap Fund? Have you made any changes in your approach, if yes what changes have you made and if not, then why not?
  9. How do you reflect on the investment approach if it does not help in achieving an alpha?

Prepared by – Punit Bansal, May 2021

Peer reviewed by – <name> Date

2020

  1. Walk us through HDFC’s investment philosophy. How has the investment philosophy evolved over the years? 
  1. You have been in the industry for 2 decades, what mistakes have you committed and what is the learning? Can you tell us about a stock that you picked that went against your favour?
  1. How do you define your investment universe and what filters do you use that access you to make decision?
  1. What is the operational risk that you face? Will the investment process and returns generated be affected with the departure of a key person?
  1. What are the valuation tools that you use to make an investment decision?
  1. What are the non- financial considerations that you look for while investing in a company?
  1. What prompts you to sell a stock?

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