What is Prashant Jain's Secret?
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Image: Vikas Khot
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Prashant Jain, CIO, HDFC Mutual Fund
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rashant Jain reminds you of the Energizer bunny. Sure, he looks nothing like the lovable character straight out of the long-running television commercial. But his nine-year winning streak at HDFC Mutual Fund is the talk of the mutual fund industry. And why not? With a corpus of Rs. 86,600 crore, it is the 800-pound gorilla of the business. Which is why, every move its 42-year old executive director and chief investment manager makes is followed actively by investors, analysts, the media and even those in his peer group.
Two of his funds, HDFC Equity and HDFC Top 200 have delivered returns of 28 percent over the last decade and are, without doubt, the best-run funds in the India. He has followed his convictions even if it meant underperforming in the short-term — like he did in 2007. Be that as it may, he has consistently emerged tops. Little wonder then, he is often voted as the one of the best CIOs by research houses like Morning Star, Mercer and several media publications. And if all that isn’t enough, the gold standard in the business, Lipper — a mutual fund research and rating firm — reckons HDFC Equity, has for each of the last five years , been the star performer in the 10-year category.
Now, Jain is the kind of man who doesn’t dwell on these facts. But fact is the sizes of these funds are increasing geometrically to its returns. HDFC Equity fund has a total corpus of Rs. 6,734 crore; the Top 200 fund is now over Rs. 8,020 crore. The latter, just moved ahead of Reliance Growth Fund, until then the biggest scheme in the country with total assets under management at Rs. 7,681 crore.
The problem as everybody sees it is this: Beyond a certain size, it becomes harder to beat the market because mutual fund managers typically bet on mid-cap stocks to boost returns. At the same time, they have to ensure that they don’t bet the house on it. Normally, when the corpus is small, there is no problem. However, as a fund grows, the asset manager faces a dilemma.
If he maintains investments in mid-caps, he ends up locking in very large sums of money there. So, assuming the market falls for whatever reason, there’s a good chance he won’t liquidate the stock on time. And if investors insist on redeeming their units, it becomes tough to rustle up the cash, resulting in a liquidity crisis.
Until now, Jain has performed an incredible balancing act. “Prashant Jain is one of the most balanced fund managers you can come across in the country,” says Hansi Mehrotra, investment consultant, Mercer. “He has delivered high returns with low risks. If you look at all the risk and return parameters, he comes off as a winner. He is truly consistent in his performance,” she continues.
According to Mercer, a firm that guides international investors on how to invest in the India markets, 95 percent of both HDFC’s Top 200 and HDFC Equity Fund can be liquidated within ten days. On average, the same number is 85 percent for other funds in similar categories. Jain achieved this by ensuring mid-caps never exceed a third of the total assets.
No mutual fund has ever faced this dilemma in India. Abroad, a handful of funds have grappled with complexities of size by opting to split funds.
Some market experts reckon this is the tipping point — and wonder whether Jain can retain his winning streak. “As the fund size grows, it will be tough to maintain returns without compromising on liquidity,” says Sanjoy Bhattacharyya, partner, Fortuna Capital.
“This is the first time we have a case like this in India,” says a leading analyst who declined to be named. “There is no question Prashant Jain is a superior fund manager. How will he perform in the future is a grey area,” he says.
Diseconomies of Scale
Jain doesn’t understand what the fuss is all about. “You guys are making a big deal about size,” he says looking us straight. “Internationally, these kinds of situations arise when the size of a fund reaches say 1 percent of the market. Why should I get worked up about size when my fund is around 0.12 percent of the market? The Indian markets are growing and as the size of my fund grows, the market will be even bigger,” he argues.
Perhaps, if one looks at past performance, Jain is right. Our research indicates the top five funds with an average asset size of around Rs. 5,500 crore have delivered 25 percent annually for the last five years. Funds with average assets under management of around Rs. 500 crore have managed to return 18 percent annually for the same period. As we go further down to the lowest five funds with average fund sizes of around Rs. 30 crore, returns are around 13 percent.
But that’s the beauty of tipping points: Things don’t always remain the same forever. Over the next two years, it will become clear whether the best fund manager in India has the chops to beat the market yet again, even with the disadvantage of a growing corpus.
There’s one thing about Jain that makes him different from other equally high-performing peers. He doesn’t take undue risk, sticks to his conviction, and is incredibly diligent about his research. No wonder the market wonders how he goes on and on and on….
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