Prashant Jain, chief investment officer of HDFC Asset Management Company (AMC), talked to NDTV Profit about the fund house's stock selection process that has helped it deliver strong long-term performance.
Sticking to quality stocks, being reasonably diversified and holding on to investments for long-term have helped us, said Mr Jain. (Watch)
Commenting on the key indicators for picking up stocks, Mr Jain said he goes for businesses with reasonable quality and management.
Quality of business can be assessed by evaluating the comparative advantages and ability of the company to survive for next 10 years, he said.
Return on capital employed (ROCE) is an effective tool for evaluating the sustainability of business, he added. ROCE is a financial indicator that shows how much return a company is generating on capital employed.
Any business which doesn't have a competitive advantage will generally fail to deliver a decent ROCE, believes Mr Jain. While evaluating a track record of a company, one can look at a tenure of 5-10 years, he added.
Mr Jain believes that evaluating management is a more subjecting thing. One can look at the track record of board of directors and auditors, and how much tax and dividend a company is paying to judge its management, he says.
But the trickiest part is the valuation of the stock or deciding what price to pay for a stock, said Mr Jain. "Markets typically extrapolate the short-term growth rate to the long term. That is where markets get it wrong, at least over the short periods."
Citing an example, Mr Jain said, in late 90s, the technology companies were very expensive as the markets believed that the growth rate of 60-100 per cent was sustainable for long period. "Those companies which were trading at 300-plus price-to-earnings (PE) multiple in late 90s are trading at 30 PE multiples today. Markets were paying a high price and as the growth rates came off subsequently, markets got it terribly wrong," he said.
"As markets focus on a particular segment, they tend to sell out or lose interest in other segments and that is where you can find good value."
Commenting on the investing style, Mr Jain said, "We take a balanced approach and look at stocks which offer growth at reasonable price."
Mr Jain believes that value investing, which requires picking up undervalued companies, is very difficult to practice as the fund manager has to make a tough call. "It is very difficult to take a long-term call as what may work over three years may cause a lot of pain over 3-6 months or even one year at times," he said.
So it is difficult to ignore what is making money today and bringing something to the portfolio which is not performing today, Mr Jain added.
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