Secret Behind Success... Mr. Pankaj Tiberwal of Kotak AMC

Retaining Talent - is THE BIGGEST CHALLENGE in any profession. But you can't do much when people want to move out for whatever reason it is.

In Investment Management industry - it is this talent that dictates results. While no one is to debate the role of process, team work etc, it is the ultimate decisions - made by fund managers - which deliver results. And when such fund Managers call it a day - for what ever reason it may be, it is indeed a loss to the organization. But it could be good for both people - if they are able to evolve better than before.

Rarely Fund managers have a decent exit. One such has been for Mr.Pankaj Tiberwal of Kotak AMC. Infact he has left a farewell note - for the benefit of everyone. 

Following is the gist of this letter:

1. Joins Kotak MF in 2009
2. In 2010 – Fund manager of Kotak Emerging Equity Fund (Rs.113 Cr) and Kotak Small Cap Fund (Rs. 127 Cr). Today KEEF is Rs.36000 Cr (2^nd largest Midcap Fund in Industry) and KSC is 13000 (4^th largest Small cap in Industry)
3. 400 unique names identified and invested in 14 yrs
4. 
   
   
   
   
5. Point to Point return – can be influenced by start date and end date
6. Rolling return is better metric
7. Investment philosophy:

• Trust takes time to build. Can be lost instantly. Reputation and Integrity – most valuable
• Avoid short cuts. Maintain ethical decision making.
• To Cut noise: Invert. Rather on focusing on where you can make 2x return over 1-2 Yrs, focus on where you can lose money over next few yrs. Maintain check list of factors for company selection. Avoid BIG mistakes.
• Process – more important. Fundamental analysis.
• Portfolio Construction – Gorilla to King Kong Strategy. Invest in 50 leading names – some could become King Kongs.
• To avoid:

1. Avoid extreme portfolio allocation. Monitor Sector / Stock weight relative to benchmark
2. Don’t Chase Momentum
3. Prioritize valuation cosiderations
4. Focus on earnings capacity rather than earnings itself.

• Stay Calm – Avoid overconfidence - Meditate 15 to 30 min a day

Prasanth Jain - Farewell : Not so great

One of India's longest serving fund manager Mr.Prasanth Jain quit his job in July 2022. 

In the last minute I got a message that there is a zoom meeting which will be addressed by Mr.Prasanth Jain for one last time at HDFC Mutual Fund. It was scheduled by 4pm or so - if I recollect right. I was right there on time. And the meeting ended in flat 15 minutes. 

And a month later the fund house 'released' a 'farewell' letter writtend by Prasanth. For a person who has created so much wealth for investors, for a fund house which sold all its funds saying his name, it was indeed a shabby farewel. 

Anyway - thought of posting this letter today for following reasons:

1. is indeed a treasure trove of information.
2. Another fund manager - from another AMC has also resigned and he has also posted a farewell letter. Before I post Pankaj's letter - I thought it is right to post Mr.Prasanth Jain's letter.

Here's an extract from the letter where Jain shares his key learnings:

a. In my experience, efficient markets hypothesis does not hold true, especially over short to medium periods. Markets can be driven by emotion and herd behaviour for extended periods

b. Sizing is very important. Any portfolio will have its share of big winners, winners, losers and big losers. In my case roughly 1/4 were losers, 1/100 were big losers, 1/20 were big winners and the rest were winners.

c. The data above in (b) highlights what Warren buffet has famously said – Rule no 1 don’t lose money, rule 2, don’t forget rule no 1. I have made more mistakes of omission than commission – some prominent missed opportunities were Asian Paints, Bajaj Finance, Eicher, Kotak Bank, Divi’s laboratories, etc., but successfully avoided the long list of businesses that caused large and permanent loss of capital.

d. 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 remain solvent (for a mutual fund manager this means to retain the job / fund).

e. 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.

Market Realities : Prasanth Jain - Chief Investment Officer (CIO) - HDFC Mutual Fund

Markets are at all time high again. Investors who participated by investing when market was low a couple of months back would be smiling and Investors who did not do so would be doubting the sanity of the rally. No doubt, when we are at all time high (by 21200), we might feel dizzy and jittery. Is markets really over valued. Should an investor invest now or not. What are the justifications behind the current market valuation. 

Here comes Mr.Prasanth Jain - a name to recon with in the Indian Investment World. His wisdom and strong track record of successful value investing is a great asset for every investor. Managing a fund size of more than 1,00,000 Crores, with deep insight in the market cycles, his recent interview with ET NOW TV Channel is worthy read for every investor. 

ET Now: In the last three months, we have seen all textures and shades of market action - virtual crash, fear, a comeback and a new high. So what is going on? 

Prashant Jain: Markets are always volatile in the short run and that is why we always refrain from taking very short-term calls. Markets probably overreacted to the threat of QE tapering, which is more relevant for the fixed income investments into India and less for equities. If you look at the FII flows into equity markets for the last 20 years, barring two years - the year of Pokhran blast, 1998-1999, and the year of Lehman Crisis, foreigners have been net buyers. So I remain optimistic and we are of the opinion that the worst on the economic front is behind us. Markets have rallied, but I do not think they are overvalued. They are, in some sense, where they were five years back and it is only the Sensex which has recovered. The broader indices are still about 15% below where they were at.

ET Now: At a time when earnings are not expanding, margins are compressing, GDP growth is not back on the track, is there a case for an economic bottom?

Prashant Jain: Let us de-link the two - economy and earnings. Economic bottom has been formed and I will refer to the new RBI governor who recently said that the second half should be better than the first half for three reasons - a) agricultural production is doing very well; b) exports have begun to grow and we know that textile exports and even steel exports are doing quite well; c) a lot has been done in terms of resolving the bottlenecks for large projects which are under implementation in the road sector, in the mining sector and also in the power sector. So, at some point of time, even capex would start to kick in.

ET Now: Ultimately, what the economy needs is a stable currency. It has been a very volatile and choppy ride for the rupee from 55 to 60, 60 to 69, 69 to 61. Do you think the rupee has stabilised?

Prashant Jain: From 60 to 69, it was driven by sentiments and also because of a spike in gold imports of extra $10 billion in those two months and the debt sales by foreigners of another $10 billion. That $20 billion in a matter of two months was a lot for the markets and that is what has impacted that. The worst on the currency front is certainly behind us. The current account is down to very reasonable levels this year itself. So the progress on current account has been far more than on the fiscal account and our reserves are beginning to grow. The initiatives taken by the RBI are also having a very good impact. So, I would assume that the worst on the currency front is behind us.

ET Now: But can markets go up at a time when inflation is roaring again?

Prashant Jain: Earnings have been much better than what was being built in at least by many sell-side experts and the key reason is that despite the slow economic growth, the currency depreciation has a very favourable impact on the earnings. 50% of the markets directly benefits from a depreciating currency and includes software services, pharmaceuticals, metals companies, refining companies and select automobile companies. Another 40 odd per cent is neutral - banks, consumer companies, and consumer non-discretionary. So the currency depreciation is helping the earnings, and the earnings will be significantly ahead of what they were at least at the beginning of year. So despite slow economic growth, earnings are likely to grow at a reasonable pace and that is clearly supportive to the markets.

ET Now: But the good end of the market which is growing is already price to perfection, be it pharma or IT and select consumer names.

Prashant Jain: Yes, you are right and in a way, the quality premium in these markets is high and I would agree with you that in the consumer names, the room for PE multiple expansion is not there. Probably there is room for some compression there. But IT and pharma are fairly valued. They are growing sectors and they are less susceptible to a slowdown unlike the consumer sector and therefore the PE multiples can hold up. Barring these three sectors, whatever else you look at, there is room for multiples to go up as economic conditions improve and let us not forget that inflation is a pass-through for equities. So, equities give you real returns equal to real growth rates. If inflation is high, equities will take it in their stride. Companies will increase prices and you will still get your real returns equal to real growth rates over time.

ET Now: You always believe in betting big and have a long-term approach and if I look at your current portfolio, you are betting big on PSUs in general. Why is that?

Prashant Jain: I don't think it is entirely correct to say that we are betting big on PSUs, but it is correct to say that we have higher than benchmark exposure to PSUs. We appreciate that PSUs have certain limitations because of the ownership structure. But nevertheless they are sustainable businesses. They have a reasonable  track record. So we like some of the PSUs despite the constraints because of the valuations and some of the businesses that we own in that space have a closer linkage to the economy and the day core economy improves, the outlook for these businesses would also improve.

ET Now: Some of your top holdings include banks, especially State Bank of India. Are you not worried about the slowdown in credit growth and the kind of NPAs some of these PSU banks could generate if the economy does not recover?

Prashant Jain: Well, we have undergone pain on that front already and as I said, the worst on the economic front to my mind is behind us and we have seen similar situations in the past as well that the Indian economy slows down. There are bottlenecks. The government takes corrective actions and over time the economy recovers. If the economy recovers, the underlying performance of these banks would improve and the markets will also appreciate that.

ET Now: So are you now aligning your portfolio for the next bull market because you are clearly not focussing on the consumer end of the market, you are focussing on the economy end of the market?

Prashant Jain: See, we had very large exposures to consumer and pharma over last two-three years....

ET Now: That has changed now. 

Prashant Jain: But over the last one year, I feel that with the sharp expansion in multiples in that space, the room for good returns is limited and therefore we have been reducing exposure to that space. That call has not worked very well so far, but there is merit in persisting with that view and over time it should turn out alright.

ET Now: So it that evaluation call or is that a business call because for FMCG companies volume growth also is a concern, the kind of numbers we have got from HUL, ITC, Colgate...?

Prashant Jain: Absolutely. What we have seen FY10-11, the volume growth has been way above the longer term averages and that was one reason why we were cautious on that space and we have been not so optimistic on that space. The consumer companies cannot continue to grow in isolation irrespective of how the economy is doing. So today if the economy is slowing down to 4% to 5%, it means your customer incomes have also slowed down. So your business will also slow down. But I do not think the multiples are yet suggesting that.

ET Now: You have exposure to a large oil stock. What is the logic in owning oil companies? We do not know what they will report, their balance sheet is still very opaque and to top it up we do not know the government policy which will dictate the oil sector?

Prashant Jain: I do not think their balance sheets are opaque. Yes, what profits they will achieve that is subject to variations of the government policy, that is a fair comment. But the main logic for holding on to these companies is that they are trading at a fraction of the replacement costs. They could be as low as 20% of replacement costs and these are not businesses which are going away.

ET Now: But that has been the logic for the last many years now.

Prashant Jain: Absolutely. We think the markets will appreciate the value in these businesses better when the burden of subsidy is reduced. But so far, it has not happened.

ET Now: So to your mind the big joker in the pack for Indian markets and Indian economy is not the central bank action, it is not BOJ or US Fed, it is oil?

Prashant Jain: Oil is very critical to India and we have consistently maintained that view for the last five-seven years that oil is more important to India than even the US or European GDP growth. We import oil equal to 6% of GDP. So, a 20% fall or rise impacts us far more than a 0.5% increase or slowdown in the US GDP. So it is very-very critical. At this point, again it is extremely critical because a lot has been done within. So if you look within the country, a lot of things which were not right have been set right or are being set right.

The key variable that remains now is how oil behaves and unfortunately it is not in our control. A $10 fall is oil prices will do wonders for India in terms of fiscal deficit, current account deficit, currency, interest rates and inflation. On the other hand, if oil prices were to spike up, it will postpone or put further stress on the economy. So oil prices are a key variable particularly at this point of time when we are in not a too good shape.

ET Now: India has always been known as a growth market. So to your mind in this current market, what is growing and is still reasonable? 

Prashant Jain: Virtually the entire market is growing. If you look at last four decades, the gap between India's GDP decadal growth rates and oil GDP growth rates has been very steady between 3% and 3.5%. So we are a growth economy. And one year of slow growth does not mean that you cannot come back to 7-8% growth rates. We will in the not too distant future....

ET Now: That is not a pipe dream?

Prashant Jain: I do not think so. We have been in situations like these before. I have been in these markets for now more than 20 years and I have seen at least three similar situations.

The CAD was not such a big problem on those occasions, but the economy was in a similar state and we have come out of it because the underlying growth drivers are very fundamental, very basic and very sustainable and these are not going away. So we will come back to those growth rates and when the economy is growing at decent growth rates, there is nothing in this country which is not growing, which does not have long-term growth potential. Of course, if you talk today, the car market is not growing, the two-wheeler market is not growing, but these are temporary issues because income levels are under pressure. But as things improve, things should get back.

ET Now: Everyone is gung ho about IT, you also have a decent exposure to IT, your large holding there is in Infosys. How would you judge IT stocks at the current juncture...?

Prashant Jain: We have had a good move in IT. I would not say that IT stocks in general are undervalued. They represent growth. They should continue to grow. What these companies tell is that the business environment is improving. They also have the benefit of significant currency tailwinds, but at these multiples at a broad level, if you leave aside individual stocks, room for PE multiples to go up meaningfully are not there and the risk of currency appreciating, which today most people do not expect, cannot be ruled out.

ET Now: So apart from banks, where are you allocating a disproportionate amount of capital?

Prashant Jain: We have a fairly balanced portfolio at this point of time and even in banks we are not disproportionately allocating. We are in line with the benchmark. Please remember that banks are 25% of most benchmarks. So it is wrong to say that we are disproportionately allocating there. We are somewhat underweight on the consumer and the pharmaceutical sectors and any recovery in the economy should be led by investments and not by consumption. Consumption should pick up growth with the lag and any revival should be led by investments and our portfolios are geared to that thought.

ET Now: Markets could remain volatile, markets could remain choppy, but you are a table thumping bull on the economy?

Prashant Jain: Table thumping may be a strong word, but I feel in my limited understanding that the worst on the economic front is behind us. The next year should be better.

Mr.Anand Radhakrishnan, Senior VP & Head Equities : Franklin Templeton AMC

Mr.Kenneth Andrade : CIO : IDFC MF

History of a Fund manager : Mr.Prasanth Jain, HDFC AMC

Year 1994. The erstwhile Twentieth Century Asset Management has floated Centurion Quantum Growth Fund, an equity product, to ride on the stock market euphoria sparked by economic liberalisation. It hired a young fund management team comprising Prashant Jain, Chandresh Nigam and EA Sundaram. Centurion Quantum Growth mobilised Rs 80 crore in the new fund offer.

Buoyed by the warm response from investors, the trio went on a shopping spree - buying newly listed companies they thought were underpriced to core fundamentals. They invested in stocks such as Techran Polylenses, Jamna Auto Industries and Shree Krishna Polyester.

But, soon the calculations went awry as a reversal in the stock market sentiment resulted in several newly-listed companies in the fund's portfolio significantly underperforming the equity benchmarks. A few companies simply vanished from the marketscape. The net asset value (NAV) and asset base of Centurion Quantum Growth hit a downward spiral. And in just 15 months, assets under management of the fund fell to Rs 40 crore while the NAV crashed to Rs 4.20.

It was a lesson well-learnt for the inexperienced threesome, albeit the hard way. The bets that backfired laid the foundation for many of today's investment beliefs of Prashant Jain - one of India's best-known and well-tracked money managers.

In the months that followed, Jain and his friends had to re-balance Centurion Quantum by liquidating all junk and non-performing stocks. "We had to sell firms at significant losses... The experience taught us that one should only invest in sustainable businesses," says Jain, the chief investment officer of India's largest fund house HDFC Asset Management Company with assets under management of Rs 92,625 crore.

This investment philosophy has probably helped Jain generate consistent returns from most of the products he manages. HDFC Prudence Fund, HDFC Top 200 Fund and HDFC Equity - all yielding 18-22% returns since mid-90s - are standing testimonies to disciplined investing.

Even as most fund houses struggled to sell their equity products due to unfavourable markets, HDFC Mutual has steadily managed to increase its equity asset base over the past two years.

We're not Reckless with Our Investments:

HDFC Mutual's assets have grown from Rs 86,648 crore in June 2010 to Rs 92,624 crore last month. Top schemes such as HDFC Equity Fund, HDFC Top 200 Fund, HDFC Prudence Fund and HDFC Opportunities Fund attracted over 65% of equity fund inflows in 2011, according to estimates by top distributors.

Further, HDFC Top 200 Fund, the largest mutual fund scheme in India with assets over Rs 11,100 crore, has generated three-year returns of 8% as against category average returns of 6.2%.

"We were lucky in the sense that right in the early stages of our career, we made mistakes; and those mistakes were made with smaller sums of money. Since then, I would like to believe, we've not made other large mistakes," says Jain, a recluse in the roller-coaster universe of fund houses.

Centurion Quantum, a few years later, was rechristened HDFC Capital Builder after Twentieth Century Asset Management was acquired by Zurich Mutual Fund and subsequently merged with HDFC Mutual Fund. Today, the scheme has assets worth Rs 462 crore and an NAV of Rs 101. Against its initial price of Rs.10 NAV, the fund has grown at an compounded rate of 13.71% to Rs.101.


The NAV, which captures the price of a mutual fund unit, is the performance barometer that rules the life of a fund manager. Perhaps, to take the ups and downs in his stride, Jain is into meditation. Friends and sell-side analysts say the man is a stickler for research and backs his stocks to the hilt if he is convinced about a company's prospects.

Such conviction was demonstrated in 2011 when shares of power equipment maker Crompton Greaves were under pressure due to poor results and allegations of poor corporate governance.

Many investors and analysts cried foul over the company's decision to pay Rs 270 crore to buy an aircraft and Crompton's non-executive vice-chairman SM Trehan's move to sell his entire holding between June 29 and July 1 after he stepped down as the managing director on June 1.


Even as many investors were considering dumping their Crompton holdings, Jain was quietly accumulating the company's shares after they plunged almost 44% in a month from July 19. "We're not reckless with our investments... It's fair to say, we put reasonable amounts of capital behind our high convictions and ideas; but we're not reckless," says the soft-spoken fund manager.

Jain is the among the very few fund managers who have not been lured by market momentums that lead to bubbles. The most memorable one being the tech bubble in the late-1990s, when Jain stayed away from the raging rally in technology stocks that turbocharged assets and returns of many mutual fund schemes.

As a result, his schemes underperformed significantly, drawing sharp criticism from investors and distributors. But, when the bubble burst in early 2000, most fund managers had to take severe hits on their portfolios, while HDFC Mutual Fund schemes were largely unaffected. This was probably the turning point in Jain's career.

"Our funds underperformed 20-30% that year...we kept on going back to our numbers to reassure ourselves. Ultimately, when the fall came, what we lost in one year, we gained in two months. That is when we stood apart from the crowd," says Jain, sitting in his office at Ramon House in south Mumbai. The lessons of the tech bubble strengthened his resolve to stay away from similar bubbles in the real estate and infrastructure sectors in 2007-08 at the expense of HDFC Mutual Fund schemes lagging its peers.

"Spotting a bubble is not difficult. What is difficult is to bear the underperformance and the pain in the short to medium term. We did not invest in real estate in 2007 and that year turned out to be really bad for us; we underperformed by almost 7%," says Jain, a fitness freak who loves his game of badminton.

But the stock market, with its imponderables, often has a way of punishing cautious managers. The investment team Jain leads made a string of wrong calls in debts papers (in the fund's fixed maturity plans) in 2008-09, resulting in losses.

Also, his conservativeness cost Jain a few multi-baggers. Brokers said Jain could not get his timing right in companies such as Asian Paints, Crisil, Bajaj Auto and Jindal Steel & Power. He even mistimed his exit from consumer stocks last year. "There have been companies which we sold a bit too early thinking there were better opportunities elsewhere.

But I don't think we've missed any large sectors. About two years ago, we sold a few consumer stocks...these stocks performed much better than we had expected," admits Jain, who is bullish on domestic equities these days.

Twelve years after his first taste with success, Jain continues to avoid the media glare. Friends say it's this quiet attitude that cost Jain a campus placement at ICICI Bank, when they visited IIMBangalore for recruitment.

"Unlike other IIT-IIM graduates, Jain could not rattle off management theories to save his life," says one of Jain's batchmates at IITKanpur. According to Dhirendra Kumar of fund tracker Value Research, Jain did not manage funds differently from other fund managers. "He just kept it simple and committed lesser mistakes," says Kumar, who marvels at Jain's ability to bounce back with strong performance after a period of lull.

Sunil Shah, former managing director of HDFC Securities and owner of Evergreen Family Office, remembers Jain as a value-picker than a momentum player. "Prashant knows 300-400 balance sheets by heart," says Shah. "HDFC funds are not momentum-driven funds. They may not generate best category returns at all times; but they will remain in the top quartile at all times."

The institutional sales head of a leading domestic brokerage qualifies Jain as a 'strongly opinionated' fund manager, who trusts very few in the market. Jain, according to him, rips apart sell-side analysts who do not have strong views to support their stock recommendations.

"Jain talks to analysts with his own set of numbers, estimates and assumptions. If you do not have anything to counter his argument or excite him, he'll not suffer you long in his office," said the institutional sales head.

Such traits bring to the fore the quiet yet aggressive, steady but ambitious nature of a man who is otherwise a recluse. "I don't think my urge to beat the markets has gone down one bit. The day that goes down, a fund manager should stop managing direct money at least," says Jain, looking up from the spreadsheets scattered on his table. Maybe, it's this fear of failure that keeps him on his toes.

Indeed, the very thought of failure scares him. "If you are not scared to fail, you're more likely to fail. It's fine if you make mistakes with your own money... you're not answerable to anyone. But when you're managing money for people, failure does impact more," he says slowly, before turning to the endless numbers flashing across the computer screens.