Market valuations to Trump 2.0: What Prashant Jain is telling his investors

When he became an investment manager, he adopted an absolutely opposite approach. He no longer believed in the eraser. He built a reputation for his ability to stick to his convictions, even if it meant lagging the markets for a while.

Jain’s track record in HDFC Asset Management Co. Ltd as one of the longest-serving fund managers was mixed. He managed the HDFC Balanced Advantage Fund from February 1994 to July 2022. Though he beat the indices, the last leg of his tenure was rough. After recording handsome returns for the first two decades, his performance was pulled down a notch by his outsized bet on public sector undertakings (PSUs).

However, even those bets eventually paid off during the last 18 months of his stint at HDFC AMC. After leaving HDFC AMC, he started his venture, 3P Investment Managers Pvt. Ltd, in May 2023. The company currently manages more than ₹15,000 crore in assets in two funds. Since its inception, it has delivered a pre-tax return of 35% compound annual growth rate (CAGR), while the Nifty 50 and Nifty 200 indices gave 18.3% and 24.2%, respectively. 

Here are excerpts from his December quarter letter to investors of 3P Investment Managers. 

Setting expectations right

Jain has sobering news for those expecting similar returns from stocks as seen during the last five years. For context, the Nifty 50 has recorded a CAGR of 16% since December 2019. Since March 2020, when the market fell sharply due to the covid-19 outbreak, the return has been a whopping 28% CAGR.

In his seventh quarterly letter, Jain told investors that “it would clearly be fallacious to extrapolate these returns as current multiples leave little room for rerating”. 

He said the reality of lower profit growth, high valuations, and many new listings leaves little room for upside. He also said high foreign institutional investor (FII) selling had broken the “one-way movement” momentum.

To be sure, markets have started showing signs of a cooldown. In the past six months, the Nifty 50 has fallen 1.3%. Kotak Institutional Equities expects Nifty earnings per share (EPS) to grow at 10% CAGR in FY24-26 compared to 16% between FY22-24.

He said the past five-year return mainly happened due to two reasons. The market experienced a sharp fall during the pandemic and the returns looked good from a lower base. The subsequent interest rate cuts by central governments also supported the market’s move.

Avoid Smids

Earlier, in the June 2024 letter, Jain said, “Post the significant outperformance of Smids (small- and mid-caps) over the last few years, the risk-reward continues to be less attractive.” The approach is reflected in the company’s portfolio. While 83% of the portfolio is deployed in large caps, just 16% is allocated to Smids.

The former HDFC AMC chief investment officer (CIO) feels large stocks are well positioned, looking at the risk and reward equation. “The consolidation/time correction in the markets and a significant correction in several Nifty stocks has moderated the multiples of large caps,” he wrote in the latest letter.

“Staggered investments in large caps are therefore appropriate for these markets. However, return expectations should be realistic. In our judgment, large-cap indices should compound ~12% CAGR over the medium to long term,” he added. 

“While it is likely that most (small- and mid-cap stocks) will not turn out to be good investments over the long term, the flow of capital to small companies is positive for the economy, and hopefully, few will turn out to be great for stakeholders and the economy. At the same time, reasonable valuations of large caps that account for the bulk of the market capitalization make a deep and broad-based correction less likely,” he wrote.

Donald Trump: Dawn or dusk

The market is waiting with bated breath for Trump’s inauguration on 20 January 2025. With a clear agenda on tariffs, deregulation, expenditure control of the US government, immigration, and a sharp focus on the interests of the US economy and fossil energy, etc., the world is bracing for a break from the norm when the leader changes hands in the world’s largest economy (26%).

But how does this affect the Indian markets?

Jain is not too worried. Looking at India’s high consumption—70% of gross domestic product (GDP)—low manufacturing exports—12% of GDP—and low current account deficit of 1%, coupled with India’s geopolitical status and good relationship with the US, he feels India should not be at a major disadvantage under the new US  president.

If all goes well, there can be positive news as well. “If oil prices move lower, given the clear intent to increase US production of fossil fuels by 3mbpd, it should work to our advantage. Oil prices have recently corrected to $74 from $88 in the last six months.”

Straight to the point: His strategy

This ₹12,522 crore fund continues to be fully invested in the market. Although Jain believes that return expectations should be tampered, he is of the view that equities would still meaningfully outperform cash over the medium to long term. As mentioned, the company has invested 83% in large-cap stocks.

“Nearly 85% of the fund, in our judgment, comprises companies that enjoy leadership/strong positions in respective businesses and should be able to increase/maintain their market share.”

The 3P India Equity Fund 1 has outperformed the Nifty 50 and the Nifty 200 since its inception in May 2023. While the Niffty 50 and the Nifty 500 gave 18.3% and 24.2% CAGR, the category-3 AIF generated a 34% pre-tax return since its inception. 

The quarterly letter said the impressive results came on the back of “some sharply undervalued pockets in the market that the fund was able to take advantage of and an underweight position in consumer staples”.

The fund is overweight in healthcare, industrials, and insurance and underweight in consumer staples, energy, and materials. Meanwhile, automobiles, banks, financials, IT, and telecom are close to market weights. In the December quarter, the fund increased weight in large banks and pharmaceuticals and went underweight in software services.

According to a person in the know, the minimum ticket size to invest in 3P India Equity Fund 1 is ₹10 crore. The 3P Equity 2 Fund M, which mirrors the first portfolio, has a ticket size of ₹5 crore. The company charges 0.7% as a management fee in the direct plan and 1.20% in the regular plan. This comes down as the investment amount goes up.