The overall investment philosophy stems from our objective of delivering superior risk adjusted returns to investors over an extended time frame. The investment philosophy is rooted in a set of well established but flexible principles that relies extensively on fundamental research. It is driven by the belief that over time stock prices reflect a business’ underlying intrinsic values and its long-term prospects. As a result, the research process aims to arrive at a comprehensive understanding of a company’s business including the nature of its interactions with customers, suppliers, competitors and regulators. The idea is to identify superior businesses with growing and predictable cash flows run by competent management and then allow the exponential power of compounding to work in our favor.
When valuing businesses, we take the perspective of a co-owner of the business and thus lean heavily on the concept of cash flows and economic earning power. In addition, we rely on various earnings multiples besides analyzing private market value and appropriate regional and global comparisons.
The basic principles that serve as the foundation for the above investment approach are:
Focus on the long term
There is substantive empirical evidence to suggest that equities as an asset class have provided superior risk adjusted returns over the long term. However, over short periods of time equity returns can be quite volatile influenced by fluctuating investor emotions and temporary fads. Additionally, different investment styles, sectors and approaches come in an out of favor distorting short-term performance. Longer-term returns are driven by economic fundamentals. As a result prices and fundamentals do decouple over shorter periods but tend to converge over time. At HDFC Mutual Fund, we focus on the long-term and aim to deliver superior returns across product offerings that in turn would help investors better plan to meet their long-term financial goals.
Our aim is to purchase stocks at a price that represents a material discount to their long-term intrinsic value or at a price that is attractive from a relative value standpoint. Doing so explicitly recognizes the importance of capital preservation and provides a supportable underlying value that provides some insulation if actual outcomes are milder than initially forecast. This is consistent with a long-term, business-like approach to investing and allows for the challenges that companies will possibly face in a competitive and fast-changing market. Besides looking at risk of an individual investment decision, we also thoroughly analyze and aim to manage overall portfolio risk.
Maintain a balanced outlook on the market
We do not believe in taking a call on the near term direction of the market indices. We avoid market timing and as a result, except for extenuating circumstances, our funds do not make substantial cash allocations. The same market mechanism that creates the opportunity for successful long-term returns also presents volatility and accompanying anxieties in the short term. As long-term investors, we feel it is appropriate to maintain the patience and discipline that is demanded at such times and to the extent possible take advantage of such uncertainty.
Through the above active management process, we aim to achieve higher risk-adjusted returns over time across all our products. Following the above investment philosophy in a disciplined manner has worked well for us as is attested by the steady out performance of our range of equity products over three, five and ten year periods.
Our investment philosophy for fixed income investments follows from the objective to deliver optimal risk-adjusted returns across our products.
A combination of top down and bottom up approaches are used to construct portfolios. Global and local macro economic variables such as growth indicators, inflation outlook, currency changes, liquidity, etc are analysed to determine the long-term and short-term trends. Short-term, cyclical economic considerations are used to fine-tune the duration of the portfolios.
Our investment universe includes government securities, corporate bonds, mortgages backed securities, asset backed securities and money market instruments. We make asset allocation changes within this universe depending upon changes in relative valuations / spreads and the forward outlook for them.
We maintain high credit quality portfolios across the board. Normally, portfolios have more than 85% in AA or higher rated assets. Credit risks are assumed after internal due diligence.
The investment strategy of individual funds follows from the investment philosophy enunciated above and is fine tuned to suit the respective investment objectives of the funds.
(Past performance may or may not be sustained in the future. Please refer to the scheme performance tables for further details)