What Prashant Jain said on his mistakes, PSU stocks & passive funds in farewell letter

The jury is still out, but Jain, he said, cannot resist his two bits to add to the confusion on these issues.

Jain said the debate over active and passive funds has gained traction in recent times with the growing range and market share of passives.

The debate, he said, is somewhat counterproductive.

“Both active / passive funds are good. Some active funds will underperform and some will outperform but all should outperform fixed income over the long term. Investors should focus more on asset allocation to equities – especially given the low allocation to equities for a majority of households,” he said.

While outperforming benchmarks is not easy and will probably get tougher, especially net of expenses, some managers should be able to outperform over time, he said, adding that this outperformance is however unlikely to be linear or consistent in most cases.

Significant divergence of portfolios from benchmarks and consequently a higher tracking error will be needed in many cases to overcome the hurdle of costs and to generate alpha over long periods, Jain said.

PSUs

Jain’s love for PSUs is known. Jain said none of his meetings with investors and distributors were complete without a discussion on PSUs over the last few years.

“This was probably because of the sharp underperformance of PSUs in CY18-CY20 and because my funds had significant exposure to this group,” he said.

Agencies

Jain said it is evident that PSUs have not underperformed across all time periods, but the underperformance of January 2018-October 2020 was so sharp that it led to underperformance even over longer time periods, creating an impression that PSUs are no good.

“So strong was the belief that people of all hues – young and old, experienced and amateurs, investment professionals and non-investment professionals – were convinced that PSUs were going to underperform perpetually. As is often the case in investing, herd behaviour and majority opinion is more often wrong than right,” he said.

Jain said a sharp outperformance of PSUs in recent years has reiterated this once again. This sequence of events has further highlighted the impact that price performance has on the opinion of market participants.

“It is heartening to see PSUs increasingly finding their way to more and more mutual fund portfolios and I am confident they will over time find their way into more FII portfolios and direct portfolios as well,” he said.

Jain said there were two key reasons in his opinion behind the underperformance of PSUs during 2018-2020 – ETFs and core sectors of the economy not doing well.

“It is interesting to note that PSUs are not present in FMCG, Retail, pharma, IT etc. They are mainly in energy, corporate banks, capital spending, etc. Over time as ETFs were done away with and as the core economy recovered, PSUs performance has turned,” he said.

Meanwhile Jain also talked about his performance over 2003-2022.

Jain said he made more mistakes of omission than commission. Some prominent missed opportunities were

, , , , Divi’s laboratories, etc.

But he also successfully avoided the long list of businesses that caused large and permanent loss of capital.

A list of some prominent sectors to which many of these companies belonged were TMT, real estate, NBFCs, select banks, infrastructure, telecom, power, media etc.

“What is particularly satisfying is that most of these were never invested in irrespective of price, he said.

Overall, Jain said, in his case roughly one of every four were losers, one of every 100 were big losers, 1 of every 20 stocks were big winners and the rest were winners. However, it is interesting to note that gains on one large winner were more than the total losses of all loss making investments, he said.

This, he said, highlights the importance of sizing – of assessment of the risk-reward associated with individual investments and sizing accordingly.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)