Be careful where you get your dope from.

The Economic Times carried an article dated March 14th, 2019 on Prashant Jain’s consistent alpha generation in a single fund for 25 years. All of us associated with the Mutual Fund industry know and admire Prashant. Other chiefs of the industry congratulated him for his contribution to the Indian Equity Mutual Fund Industry – rightfully so. He is simply brilliant, no one would dream of disputing that. We have all learnt from him and wouldn’t miss a chance to hear his views, expressed in his unique gentle and calm manner.

Here is what the article said:

“HDFC Mutual Fund’s chief investment officer Prashant Jain has become the first Indian fund manager to complete 25 years managing a single fund. He achieved this in 2019 with HDFC Balanced Advantage Fund which has generated an alpha of 9.54 per cent over the Sensex since 1994”

Now this claim, and the data that the Economic Times has used to support the same is incorrect at so many levels and that one wonders why it had to be conceptualised or written at all.

Surely, Prashant Jain needs no false claims to make an impression on die-hard fans in clients and investment advisors!

Incorrectness – Level 1

HDFC Balanced Advantage Fund is a not a 25-year old fund at all!!

A PWC report very aptly described that “SEBI’s circular on mutual fund scheme categorisation and rationalisation aimed at decluttering the existing industry by simplifying mutual fund investments for investors and enhancing comparability within the schemes offered.

HDFC AMC at that time, had various Equity Funds, HDFC Growth one of them, and two balanced funds, HDFC Balanced and HDFC Prudence.

Out of a clear blue sky, the AMC made its own interpretation of the circular and did the following:

HDFC Growth Fund, an Equity Fund (Size about One Thousand Crores only), first, was made to undergo an ‘attribute change’, it was made a Hybrid fund and rechristened as HDFC Balanced Advantage. Post that, HDFC Prudence, a Balanced Fund (Size about thirty-seven thousand crores then) was merged into it. Economic Times may not get it, but several others like the Mint do.

Incorrectness – Level 2

In case of such a strange merger, whose performance record do you think should be maintained? Another SEBI Circular clearly stated how past performance was to be reported.

Long story short,

If HDFC Growth merged with HDFC Prudence and HDFC Prudence’s attributes remained, then they could continue to report HDFC Prudence’s performance.

If it retained HDFC Growth’s attributes, then growth’s performance was to be taken.

HDFC Growth was rechristened to HDFC Balanced Advantage i.e., an EQUITY FUND was first converted into a HYBRID fund, HDFC Prudence which was a balanced fund was merged with it, and whose performance was retained? HDFC Growth’s! Many bloggers have written about this here and here.

Incorrectness – Level 3

HDFC Growth was managed by Srinivas Rao Ravuri. I am sure credit is due to poor Srinivas as well, IF there has been any alpha generation over a benchmark of anyone’s choice, in the first place. The fact is, HDFC Prudence Fund’s 25 years of performance records are actually now not available! The records that are available are actually those of HDFC Growth Fund, the former equity fund. No mention of Srinivas’ performance but using his performance on a much smaller, nimble equity fund is a perfect example of what students of finance understand as Survivorship Bias. Survivorship bias is the tendency to ignore the performance of the funds that do not exist anymore.

As can be seen in the table below, the Growth fund has shown higher returns in the recent years while Prudence fared better in the older times.

“As the HDFC Prudence Fund grew bigger, its ability to perform slowly seemed to be deteriorating”

HDFC Growth Fund, on the other hand, was performing well, maybe due its size, mandate, fund manager ability? Why were they merged AT ALL?

Source: HDFC Mutual Fund Factsheet - April 2018

Incorrectness – Level 4

The benchmark that the article uses. It mentions in one corner, that HDFC Balanced Advantage is a hybrid fund and it uses a custom-made benchmark the data for which is not available. Fair enough. But Sensex cannot be used as a benchmark even for an index fund tracking the Sensex itself. In its circular date January 4th 2018, SEBI has made it clear that the performance of mutual fund schemes shall be benchmarked to the Total Return variant of the respective scheme’s stated benchmark. The reason behind this mandate was that simple indices (Price Indices) only showed capital gains whereas Total Return Indices account for the dividends paid during that entire period.

“Are we in the stone age even now?”

Incorrectness – Level 5

The definition of the new fund itself has changed. As a dynamic asset allocation fund, HDFC Balanced Advantage Fund’s allocation in equity and debt can be anywhere between 0% and 100%. It is true that the data for the fund’s stated benchmark is unavailable. Considering that it is being called the erstwhile HDFC Prudence Fund, the index that is closest to such composition could be CRISIL Balanced Fund Aggressive Index Nifty 50 index – 65% + CRISIL Composite Bond Fund Index – 35%.

The alpha, if calculated in this case is HUGE, simply because we are comparing a fund with 25 years of Equity performance with a balanced fund index.

Incorrectness – Level 6

The comparison with Peter Lynch! For people who do not read, Lynch managed his fund for 13 years. Yes, only 13 years. His leaving early was at the peak of a stock market cycle and many say that he was prescient and could see the bear phase coming. Some have even pointed out that, with no disrespect, that his merit to generate alpha still remains largely untested during an extended period of decline in his home market indices.

The best sportsmen try and retire at their peak. I personally find that extremely graceful”

Lastly, who talks about 25 years of performance? What were you doing in 1994? Did you invest? I was pretty young and I couldn’t care less. I have been in the wealth management business for almost 18 years – the longest I have seen people holding on to funds is 10 years, and no, they were NOT happy with HDFC’s performance. HDFC Funds have not been top quartile for very very long. And now, instead of acknowledgement and explanation, this is what investors get.

Harbouring a survivorship bias, benchmarking against a price return index, making unfounded claims in the article is plain baffling to a more discerning audience. Comparing the likes of Peter Lynch on the basis of misfit data & ignoring different countries’ equity risk premiums, is juvenile, lame and misleading – also irrelevant by the way. I would rather that people didn’t attempt writing stuff on investments with such little understanding of anything.

To give HDFC its due, if a fund really has returned 18.48% compounded annual growth rate, then it is commendable in any case. Even if it returned no alpha, the Indian investor may not even mind. Then why this article? AMCs have been entrusted with the task of educating mutual fund investors. The information that Economic Times publishes, quoting ‘Morningstar Direct’ is unlikely to land up with the newspaper without the AMC’s intervention. Is this education or perpetuating a spell of ignorance? I leave it to readers to decide.

(With inputs from Vineet Rajani)