Prashant Jain’s AIF returns 58% in its 1st year, with little help from SMID caps

According to the latest data, as of 28 June, the category-3 alternative investment fund (AIF) delivered a 58.4% return since it was launched in May 2023, while the Nifty 50 and Nifty 200 delivered 33.7% and 44.7%, respectively. The fund manages assets worth Rs.10,612 crore and has invested 82% of this in large caps, 5.7% mid caps, and 12% small caps.

“Post the significant outperformance of SMIDs (small and mid cap stocks) in the last few years, the risk and reward continue to be less attractive," Jain, CIO of 3P Investment Managers, and co-fund manager Ashwani Kumar wrote in a letter to investors for the June quarter, which Mint has seen.

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Jain was chief investment officer at HDFC AMC from 2004 to 2022. He managed the HDFC Balanced Advantage Fund (earlier known as HDFC Prudence Fund), a hybrid equity fund, for 28 years (1994 to 2022).

In the letter to investors, he said 3P India Equity Fund 1 expects equities to deliver a 12% compound annual growth rate (CAGR) over the long term. The rationale is that the current multiples are 12% and 23% higher than the 10-year and 15-year averages, respectively. He added, “While these multiples are supported by improved growth prospects, lower cost of capital, and lower volatility in the markets driven by higher domestic flows, there is limited room for these to expand."

Where he’s investing

The letter went on to say the risk-reward ratio in the manufacturing and defence sectors is unfavourable due to the significant outperformance and sharp multiple expansion they have already seen. For context, the Nifty Defense index has almost doubled this year while the Nifty Manufacturing index is up 35%, according to Bloomberg data.

“Sale of stakes by MNC parents in Indian arms (Whirlpool 24%, Timken 10%, and ZF 7.5%), despite strong business fundamentals and growth prospects, is also supportive of this view," read the letter.

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The asset manager is overweight on consumer discretionary, financials, healthcare, industrials & utilities, and underweight on consumer staples, IT, materials, and oil and gas. It looks to invest in companies that have leadership/strong positions and will be able to maintain their market share. Last quarter, the fund invested in the IPO of Ixigo (Le Travenues Technology), which offers Indian travellers a platform to book rail, air and bus tickets, and hotel stays.

As the fund competes for 12 months, the fund house said the tax rate will also decline progressively over the next few quarters as more holdings qualify for long-term capital gains tax (10%) rather than short-term capital gains tax (15%). Taxation happens at the AIF level.

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Arun Kumar, head of research at FundsIndia, said Jain bets on a group of stocks that he thinks will do well in a particular market cycle. “Broadly, he figures out where valuations are cheap and, before the cycle turns, tries to build a large position and let it run." He added, “His last pivot, from the consumption to investment theme, took longer than expected and his fund struggled for four to five years. Although his calls started working at the end, his toughest time was during the transition of the cycle."