Some call him the Indian mutual fund industry's Donald Bradman, for others he is no less than Sachin Tendulkar. After months of speculation, famed money manager Prashant Jain is retiring from corporate life after spending over three decades in fund management and research in the MF space, including 19 years at HDFC Mutual Fund where he last held the position of Chief Investment Officer (CIO).

The news of Jain’s exit, who individually oversaw key funds viz. HDFC Flexi Cap (BL Star Track MF Rating 3), HDFC Top 100 (BL Star Track MF Rating 2) and HDFC Balanced Advantage (Unrated), was made public by the AMC on July 22, along with the appointment of trusted hands Chirag Setalvad as Head Equities and Shobhit Mehrotra as Head Fixed Income.

On July 25, the fund house also announced that the three funds will have a change of guard. From July 29, HDFC Balanced Advantage will be managed by. Gopal Agrawal, Srinivasan Ramamurthy and Anil Bamboli; HDFC Flexi Cap will be stewarded by Roshi Jain and HDFC Top 100 by Rahul Baijal (who joined earlier this month from Sundaram MF). Jain is an institution in himself in the Indian MF industry, and personally managed ₹1 lakh crore in this three funds. Understandably, fund investors want to know what they should do now.

First, let us look at individual fund performance of the three funds.

HDFC Balanced Advantage

Jain held the record of being the longest serving fund manager as HDFC Balanced Advantage was managed by him for 28 years. Incepted as Centurion Prudence in January 1994, this product was renamed to Zurich India Prudence and then became HDFC Prudence Fund. The name was last changed to HDFC Balanced Advantage Fund (HDFC BAF) in June 2018 when SEBI set off fund recategorisation. Under Jain, HDFC Balanced Advantage ( ₹43,079 crore) is the largest product in the dynamic asset allocation category ahead of giant peers such as ICICI Pru Balanced Advantage and SBI Balanced Advantage.

An outlier in the category (probably due to its recent reclassification), HDFC BAF has been traditionally managed with 65-80 per cent equity portfolio, which is very different from other BAF funds which do practice the dynamic asset allocation much more fluidly. This has led to times when the fund has performed differently than peers. Also, Jain's value-conscious approach meant investors had to warm up to occasional underperformance.

Below is the point to point performance of the fund. Jain is exiting on a high in terms of this performance measure.

And, here are the annual returns of the same fund over the last completed 10 years. The fund has gone through ups and downs Calendar year wise. For instance, in 2019 and 2020 when the Nifty gave 12-14 returns each, the fund had under-performed. This could be linked to Jain’s unique investment style, which has its share of plusses and minuses.

HDFC Flexi Cap

One of the oldest running funds, HDFC Flexi Cap has been around since January 1995. The fund was earlier known as HDFC Equity Fund. It used to be a multi-cap fund. In line with Jain’s high conviction approach, the fund has made hay when he spotted opportunities in beaten-down sectors ahead of the pack. In recent times, after a couple of forgettable years, the fund has started pushing the pedal.

Below is the point to point performance of the fund.

Here are the annual returns of the same fund over the last completed 10 years. Given Jain’s penchant of moving in and out of sectors, much earlier than peers, the fund fared poorly against peers in 2015, 2019 and 2020 i.e. category average.

HDFC Top 100

HDFC Top 100 Fund came to being in October 1996. It was managed by Jain from January 2003. The fund's mandate fits well with the star fund manager's comfort with choosing large cap companies with well established businesses that are in operation for a longer period of time and are well positioned to absorb business pressures across various market cycles. On the active-managed side of large-cap funds, HDFC Top 100 is the fifth largest product behind Axis Bluechip, Mirae Asset Large Cap, SBI Bluechip and ICICI Pru Bluechip.

While the fund regained its mojo in last few months, the shrinking alpha of large-cap funds across the industry in recent times is evident in this case too. However, with a track record of over 25 year / five market cycles on its side, HDFC Top 100 under Jain over long-term has successfully navigated the market excesses/corrections and generated meaningful alpha. Below is the point to point performance of the fund.

Here are the annual returns of the same fund over the last completed 10 years.

What should investors do now?

As highlighted above, Prashant Jain's investment style was unique. An astute value investor, he has been ahead of the crowd many a times. This has also meant that when his formula worked, it brought rich dividends for those willing to stomach higher volatility or risk. Be it infra stocks in 2007 or NBFC stocks ahead of 2018 correction, he was quick to move out. His calls of backing some PSUs did not bear fruit for quite a bit of time, but the theme has started playing out in the last few months. Since these three funds were personally managed by him, the investors had a comfortable equation with him. They loved the contrarian streak in him, even though his approach invited extended periods of under-performance at times. But since Jain proved to be right in the hindsight numerous times, investors were okay with it.

The new fund managers of the three funds are all seasoned professionals. Chirag Setalvad, Shobhit Mehrotra, Gopal Agrawal, Srinivasan Ramamurthy, Anil Bamboli, Roshi Jain and Rahul Baijal are well-known on their own. But do they have the Prashant Jain x-factor? This will not be evident quickly. It will take 2-3 years to understand as Jain's shoes are quite big to fill. From HDFC MF's approach in appointing managers, it is clear that putting many managers at work is obviously a smart way to de-risk portfolios, remove single manager biases and let them share the burden . In terms of manager mix, there is a mix of HDFC MF talent and new blood drawn from elsewhere in the industry.

An important thing investors must understand is that star managers such as Jain often are intuitive. His high conviction bets and persistence to stick with them in the face of investor disappointment may not be a trait that can be institutionalised. Some parts of his investment process and portfolio management style can be imbibed if they are rule-based, but the rest can't be. This is where new fund managers will have their job cut out. On one hand, they will have to manage expectations and maintain business continuity, and on the other, they will have to show they are worthy successors of Jain in HDFC MF.

It may be a while before investors can perceive distinctive changes from the new team. It would be difficult for them to match up to his lofty standards and investors should give new managers some time, before arriving at any conclusions. As such, continue to hold existing investments in HDFC Balanced Advantage, HDFC Flexi Cap and HDFC Top 100, but be mindful of sustained performance slip ups.

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