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Prashant Jain’s 80-20 formula for winning in share market: HDFC MF veteran sums up wisdom in farewell letter

One of India’s best-known and successful fund managers Prashant Jain ended his 19-year stint at HDFC Mutual Fund this week, after resigning as the chief investment officer last month, marking the end of an era in the mutual fund industry.

Prashant Jain’s 80-20 formula for winning in share market: HDFC MF veteran sums up wisdom in farewell letter
In his farewell letter, Jain shared the 'Pareto Principle'. "While pursuing PGDM at IIM Bangalore in 1989-1991, I was introduced to this principle. It states that typically 20% of the effort gives 80% of the results and vice versa," he said

One of India’s best-known and successful fund managers Prashant Jain ended his 19-year stint at HDFC Mutual Fund this week, after resigning as the chief investment officer last month, marking the end of an era in the mutual fund industry. In his parting letter to the company employees, the industry veteran talked about his journey of the last 30 years as a fund manager, and also shared some valuable investment advice. “I consider myself fortunate and blessed to end this innings on a winning note and to have achieved a seamless and smooth transition,“ Prashant Jain said.

20% effort – 80% results

In his farewell letter, Jain shared the ‘Pareto Principle’. “While pursuing PGDM at IIM Bangalore in 1989-1991, I was introduced to this principle. It states that typically 20% of the effort gives 80% of the results and vice versa. My experience with investing is a good illustration of this,” he said. The fund manager shared that he made investments in a total of 465 stocks in the three funds he managed. One in four stocks lost money. Of the total net gains of approximately Rs 87,000 crore (including dividends), 55 stocks accounted for a gain of more than Rs 74,000 crore (including estimated dividends) i.e. 85% of total. “If only one had the wisdom of avoiding 90% of the investments and instead invested more in the 55 stocks!” he said.

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For the uninitiated, Prashant Jain began his career in May 1991, when he became the second member of the equity research team of SBI Mutual Fund. He was given additional responsibility of handling the money market desk, and post that he was made in-charge of a scheme. After a brief stint in fixed income at SBI MF, he was assigned Centurion Prudence Fund, a close-ended balanced fund in 1994, which was renamed Zurich India Prudence Fund, HDFC Prudence Fund and finally HDFC Balanced Advantage Fund (BAF) over the years. This fund has delivered a CAGR of 17.91% in the last 28 years and 7 months. According to Jain, Rs 100 in this fund grew to Rs 10,940 over this period.

Journey from Rs 100 to Rs 10,940 of HDFC Balanced Advantage Fund

In the letter, Prashant Jain elaborated on his journey as fund manager at HDFC AMC. “Looked at in another way, this journey of Rs 100 going to Rs 10,940 was largely a result of 6-8 key decisions,” he said, referring to HDFC Balanced Advantage Fund returns in the last 28 years. These key decisions included staying away from the ‘dot com bubble’ in the late 1990s; shifting to FMCG and pharma, which outperformed in 2002-2007, and betting on capital goods, utilities and corporate banks in the 2010s. “Markets are reasonably efficient over long periods. The duration of mispricing or inefficiency can vary from several quarters to several years. It is important in this period to stay the course and to remain solvent (for a mutual fund manager this means to retain the job / fund),” Jain wrote.

Herd mentality more often wrong than right; best yet to come in PSU stocks

Talking about his bet on PSU (public sector undertakings) stocks that saw sharp underperformance in 2018-20, Jain wrote in his letter: “As is often the case in investing, herd behaviour and majority opinion is more often wrong than right. The sharp outperformance of PSUs in recent years (I believe the best is yet to come) has reiterated this once again.” He further said that it is heartening to see PSUs increasingly finding their way to more and more mutual fund portfolios and that he is confident they will over time find their way into more FII portfolios and direct portfolios as well.

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Equity class generous, stay invested for long-periods

One of the most important pieces of advice that Jain shared in his letter was about having patience when investing in equities in order to reap returns. He said, “equities are a generous asset class. The tailwind of a growing economy and growing companies overshadows mistakes of timing and security selection in diversified portfolios in most cases over long periods. The key is patience to stay invested for long periods.”

Moving On

Concluding the long letter, Jain said, “Having done little else than manage money for 30 years and that too in one place, it is very difficult to move on. I could have continued but I felt it appropriate to move now as all the stars were aligned… I had a strong desire to move when NAVs were near all-time high and when there was alpha across time periods. I thus ran out of reasons to hang in. As if this was not enough, the assets under my management crossed Rs 100,000 crores a few days before I tendered my resignation – I take this as a divine nudge to me to make way for others,” he added.

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