The curious relationship between Prashant Jain and HDFC Balanced Advantage Fund

Prashant Jain, one of many best-known fund managers within the Indian mutual fund business, stepped down as chief funding officer of HDFC AMC on July 22. This was only a few days after his managed belongings crossed the Rs 1 -trillion mark. HDFC Balanced Benefit Fund (HDFC BAF), one of many marquee schemes that Jain managed, has a wealthy historical past of rewarding its long-term traders. With an asset measurement of Rs 43,079 crore as of June 2022, HDFC BAF has returned a compound annual progress price of 18 p.c since its launch almost three a long time in the past. Whereas Jain’s technique delivered commendable outcomes over the long run, it had not been in a position to totally adapt to altering market dynamics at instances. Certainly, his funding philosophy took a beating many instances over the historical past of HBAF, partly as a result of his conviction on market circumstances and partly as a result of rising competitors from new entrants within the MF business, particularly small and mid-sized fund homes. We take a look at HDFC BAF, which Jain managed continuous for over 28 years from inception, and his legacy.

In mid-2018, market watchdog SEBI got here out with a regulation for recategorisation and rationalisation of mutual fund schemes, which noticed many schemes bear title modifications, modification of funding mandates and mergers. HDFC mutual fund merged two of its flagship schemes ‘HDFC Prudence Fund and HDFC Development fund’ and renamed them as HDFC Balanced Benefit Fund. Submit the merger, the observe file (since inception date, together with dividend historical past, and so forth) of the erstwhile HDFC Prudence Fund, which had an extended historical past of rewarding unitholders properly, have been thought of for the fund. Launched in 1994 by the erstwhile Twentieth Century AMC, HDFC Prudence was initially generally known as Centurion Prudence Fund. Although its fund home modified palms twice — Zurich India AMC acquired it in 1999 after which HDFC AMC acquired Zurich India in 2003 — Prashant Jain continued to handle the scheme from the time it was launched. Jain thus holds the file for managing a single mutual fund scheme in India for the longest length.

HDFC Prudence, the sooner avatar of HDFC BAF, was an aggressively managed hybrid scheme, and had a static asset allocation method, with 70-80% in equities. Until June 2021, HDFC BAF had managed to carry not less than 70% in equities. Regardless of being a hybrid scheme, it managed to generate long-term returns much like these of fairness schemes. For example, efficiency as measured by the common of a 10-year rolling return calculated from the final 20 years’ NAV historical past reveals that HDFC BAF delivered a compound annual return of 16 p.c whereas the Nifty 50 – TRI gave 13.3 p.c.

Jain adopted a worth model fund-management method. He picked shares which are undervalued and selected sectors that profit when the economic system does properly. HDFC BAF portfolios all the time held massive portions of shares from sectors similar to banking, energy, petroleum merchandise, infrastructure and software program. Even amongst banks, Jain preferred state-owned and company banks similar to ICICI Financial institution. His portfolio was prepared to profit from an financial restoration, however at instances when the restoration was delayed, it took a beating. Increased allocation to the shares of PSU banks and the facility sectors was another excuse his funds didn’t do in addition to the competitors. The worth model of inventory selecting had additionally not favoured him between 2013 and 2019, when worth funds underperformed progress oriented funds significantly.

Jain most well-liked high quality firms with sturdy enterprise fashions and aggressive strengths. His valuation-consciousness and conviction in constructing a portfolio that advantages from a turnaround within the financial cycle labored out properly over the long term. He recognized and invested in lots of shares at their early stage of progress. A lot of his long-term holdings have been multi-baggers and rewarded traders properly.

In the course of the interval between 2013 and 2018, many fund homes have been aggressively selling the dividend plan of their balanced funds and unofficially promised to pay round 1 p.c in month-to-month dividend payouts on the principal invested. Throughout this era, dividends distributed by fairness funds (together with fairness balanced funds that invested not less than 65% in fairness belongings) have been solely tax free within the palms of the investor. So, many traders flocked to the dividend plan of the balanced funds. HDFC BAF benefited and collected a big corpus. Nonetheless, these dividend plans misplaced sheen when Union Funds 2018 proposed a dividend distribution tax (DDT) on the price of 10 p.c on equity-oriented mutual funds. That growth however, HDFC BAF has a wealthy observe file of paying dividend revenue to unitholders. It nonetheless continues to distribute notable dividend revenue to them. For example, the month-to-month dividend choice of HDFC BAF has distributed a cumulative gross dividend of about Rs 13.8 per unit during the last 4 years.

A lot of the schemes within the Balanced Benefit Funds class have been both newly launched or modified their elementary attributes in the course of the recategorisation train made throughout mid-2018. Of the 26 schemes underneath the class, HDFC BAF has topped the chart when it comes to return during the last 4 years because the new BAF class was launched. HDFC BAF was the odd man out until final yr. In June 2021, HDFC BAF started taking spinoff exposures and diminished its internet fairness allocation to 57 p.c. In different phrases, HDFC BAF lastly shed its unique avatar and embraced the dynamic asset allocation attribute of the class it belongs to.

HDFC BAF will now have three fund managers. That is the primary change on the helm in its chequered historical past of 28 years. Gopal Agrawal and Anil Bamboli will now handle the fund, whereas Srinivasan Ramamurthy will deal with asset allocation. Ramamurthy will determine how a lot HDFC BAF will put money into fairness and the way a lot goes into debt.