how consistently did he beat the market?

Prashant Jain, the CIO of HDFC mutual fund, has resigned after a 19-year stint. In this article. We evaluate the performance consistency of three of his funds, HDFC Top 100 Fund, HDFC Flexicap Fund and HDFC Balanced Advantage Fund.

The world of mutual fund investing changes so fast that Prashant Jain’s track record of excellence is largely unknown to the huge number of young mutual fund investors who started just a few years ago. Prashant Jain was a superstar fund manager up until the 2008 financial crisis. When the markets recovered, the AUM in his funds swelled suddenly, severely restricting his ability to churn the portfolio. As a result, his funds gradually became large-cap-oriented. His stardom and ability to beat the index gradually waned in the last decade.

At the time of writing, HDFC Top 100 has not beaten the BSE 100 over the last ten years!  The other two funds have underperformed the NIfty 50 over the last seven years! He has been criticised for his stock pics and fund size.

This is the performance of these funds since 20th June 2003. Impressive as they seem, we need to find out how consistently they were able to beat the market (defined as Nifty 50 TRI) using rolling returns.

Nav evolution of three Prashant Jain managed funds HDFC Top 100 Fund, HDFC Flexicap Fund and HDFC Balanced Advantage Fund
Nav evolution of three Prashant Jain managed funds HDFC Top 100 Fund, HDFC Flexicap Fund and HDFC Balanced Advantage Fund

HDFC Balanced Advantage Fund: The fund was launched in Feb 1994 as Centurion Prudence Fund by Twentieth Century Asset Management. Zurich India Asset Management then acquired it in 1999 and HDFC Asset Management in 2003, after which Prashant Jan started managing it.

In April 2018, to comply with SEBI categorization rules, HDFC announced that HDFC Growth Fund would be called HDFC Balanced Advantage Fund and that HDFC prudence would be merged into this new fund (balanced advantage).

HDFC Flexicap Fund started as Centurion Quantum(inception date December 8, 1994). When Centurion sold to Zurich AMC in 1999, the fund became Zurich India Equity Fund. When Zurich sold the fund to HDFC AMC in 2003, it became HDFC Equity Fund. Prashant Jain started managing the fund in June 2003. To comply with SEBI mutual fund categorization rules, it was re-labelled as HDFC Flexicap Fund.

Aarati Krishnan wrote in an April 2001 article, “The small size allows the fund manager considerable flexibility in churning the portfolio, in the event of a reversal in market trends”. That changed after the 2008 market recovery.

Prashant Jain has continued to maintain that size is not a problem for any of his funds. This quote from the article is most interesting.

Way back in 1991, when I started my career, there was no screen-based trading; there were no mobile phones. While travelling, we would stop at a public call booth to check on the markets. Research from brokerages was less and information gathering itself was a major activity. I remember we had tied up with a few scrap paper dealers to sell annual reports to us by the kilo. No company visited us in our office except at the time of public issues. There was no investor relations role in companies. There were no star ratings done on mutual funds. Airfares were less affordable and we were advised to keep travel to a minimum, unlike today, when people have to be prodded to travel more.

HDFC Top 100 Fund: ITC Threadneedle Top 200 was launched in late 1996. It changed hands in 1999 and became Zurich India Top 200 Fund with Bobby Surendranath as the manager. Mr Jain took over in 2001 and has remained the fund manager ever since. HDFC acquired Zurich AMC assets in 2003, and the fund became HDFC Top 200.

To comply with SEBI mutual fund categorization rules, the fund (already a large cap oriented by then) became HDFC Top 100 Fund.

In 1991 this author was still a year from finishing school, and many reading this would have been in kindergarten or not yet born. Mr Jain’s track record and extraordinary achievements over the years are not to be trifled with. That said, ultimately, the investor wants performance for the additional fee paid, and one cannot wait forever for his funds to outperform.

The performance consistency of Prashant Jain

We shall evaluate the regular plans of the above three funds from 20th June 2003 with Nifty 50 TRI. Although HDFC Balanced Advantage Fund is a hybrid fund, it is quite aggressive, with higher volatility than some diversified equity funds. So a comparison with Nifty 50 TRI is justified.

1 Rolling return outperformance consistency: the fund returns are compared with category benchmark returns over every possible 3Y,4Y, and 5Y period. Higher the outperformance consistency, the better. Suppose 876 fund returns were compared with 876 benchmark returns, and the fund has beaten the benchmark 675 times. The consistency score will be 675/876 ~ 77%.

Three years: 3276 3Y windows were considered.

  • HDFC top 100 regular plan 64% (Rolling return outperformance consistency)
  • HDFC Balanced Advantage fund regular plan 54%
  • HDFC flexicap regular plan 65%

Four years: 3032 3Y windows were considered.

  • HDFC top 100 regular plan 64%
  • HDFC Balanced Advantage fund regular plan 56%
  • HDFC flexicap regular plan 68%

Five years: 2783 5Y windows were considered.

  • HDFC top 100 regular plan 72%
  • HDFC Balanced Advantage fund regular plan 65%
  • HDFC flexicap regular plan 73%

All things considered, that is an extraordinary track record over 5y window. The 65% score for HDFC Balanced Advantage Fund against Nifty 50 is quite acceptable as the fund held 10% to 20% of bonds at all times.

2 Upside performance consistency over every possible 3Y,4Y, 5Y: Higher the better. A score of 70% means, 7 out of 10 times, the Fund performed better than the category benchmark when the benchmark was moving up. This is a measure of reward. It is computed from rolling upside capture data (see link below).

3 Downside performance consistency over every possible 3Y,4Y, 5Y. Higher, the better. A score of 60% means, 6 out of 10 times, the Fund performed better than the category benchmark when the benchmark was moving down. This is a measure of risk protection. It is computed from rolling downside capture data. Read more: An introduction to Downside and Upside Capture Ratios.

Rolling upside capture and downside capture ratios of three of Prashant Jains funds
Rolling upside capture and downside capture ratios of three of Prashant Jains funds

Again that is a fairly decent performance. Most funds do not exhibit upside performance. See: Strange, but true! How mutual funds beat the index! The downside protection consistency is quite good.

What Mr Jain has accomplished over the years, managing the weight of assets, expectations, and pressures from the management, distribution network and investors, is quite remarkable. However, in the recent past, by his own high standards, the performance of his funds slipped. That should, however, not dim our admiration.

What should investors do? This is a good time to review the performance of the funds since the time you started investing in them. This might be a good time to exit if they have not beaten the benchmark. You could continue if you are “ok” with the performance. These suggestions hold good whether the fund manager has quit or not!

Disclosure: I have invested in HDFC Top 100 and HDFC Flexicap in the past (prior to their name changes) and have quit them to declutter my portfolio. I currently hold HDFC Balanced Advantage and will continue to hold/invest in it as long as the performance is acceptable.

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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.

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