PPFAS Mutual Fund has made quite a name for itself, even though it is a new and small fund-house. In a world of multitude of schemes, PPFAS MF has just one equity scheme – Parag Parikh Long Term Equity Fund, which has over 78,000 investors. RupeeIQ’s Kumar Shankar Roy caught up with Rajeev Thakkar, Chief Investment Officer, PPFAS Mutual Fund, to know his views on how the fund house is planning to grow assets, market valuations, fund activity and much more.
Thakkar has over 18 years’ experience in various segments of the financial markets such as investment banking, corporate finance, securities broking, and fund management. His fund management career commenced in 2003 when he was appointed the Fund Manager for PPFAS Portfolio Management Service’s flagship scheme titled “Cognito”. Read on.
PPFAS MF has established itself as a quality player. But, its AUM is low. Why do you think investors are not rushing to invest with you? Please elaborate.
To understand the AUM of PPFAS, one has to look at the context. PPFAS transitioned in 2013 from a Portfolio Management Service provider to a Mutual Fund. At that time the AUM of the Portfolio Management Services was about ₹ 300 crore. For a Portfolio Manager, even that AUM is quite reasonable.
Currently, the AUM as a mutual fund is just under ₹ 2,000 crore. The growth rate for us is quite good and we are happy with that. In fact, some analysts and some media reports put our AMC as the fastest growing AMC in the FY 2018-19 in percentage terms. This is the glass half-full aspect.
Sure, there is a glass half-empty aspect as well. We are among the smallest AMCs on an absolute size basis. This is in our view to be expected. The first five years of any AMC are spent in establishing an investment track record. It is only then that investors and advisors start looking at the fund.
Also, we are deliberately absent in a large number of fund categories. We are completely absent in the ETF space, Fixed Maturity Plans, Gold Funds, Thematic Funds, Balanced Funds, Medium to Long dated Debt funds and so on. Even our liquid fund is more of a facility to enable Systematic Transfer Plans rather than a serious attempt to get large corporate investors. Our ELSS scheme will launch sometime in this financial year and currently, we are absent there as well.
Hence, the relevant overall AUM for the space that we operate in is about Rs 5 lakh crores rather than the Rs 23 lakh crore that are the AUM of all mutual funds put together.
Given the late entry of our AMC, the lack of a bank or a large corporate house parentage and the lack of a well known retail brand, we are quite happy with the growth that we are seeing for ourselves.
Our physical presence rollout will also happen on a sustainable organic basis. For the first five years, we were present only in Mumbai. Very recently we have our representatives in NCR and Bengaluru. We will wait for the new city presence to stabilise before venturing to newer locations.
We will continue to offer a differentiated product and focus on sustainable organic growth rather than chase AUM or compete with the industry behemoths.
As someone who has spent over 15 years in capital markets, you have a wealth of knowledge in terms of how prospective investors select products. How does an average investor select an equity fund? Also, tell us how should they actually select a fund? Please share the details.
Most investors look at trailing 1 year, 3 year and 5-year returns and select funds which have given the highest returns in the recent past.
Most investors should completely eliminate thematic funds for their investments and stick to diversified equity funds from Large Cap, Multi-Cap, Mid Cap and Small Cap funds as per their risk appetite and financial plan.
Many investors invest without a financial plan or understanding of the products. This is harmful. Only those who understand the risks and suitability should invest on their own. Others should seek advice.
Today, external and internal agencies/outfits rate mutual funds. They give out rankings based on their assessment. As the CIO, how do you review your equity fund? What are the things that you look at and why? What are the things you ignore and why?
There is a wide variety of agencies that rate mutual funds and it is difficult to compare across all the agencies.
When I look at our fund (or any other fund for that matter), among the things that I look for are
- Clearly defined investment philosophy and process
- Stability of the fund sponsors and investment team
- Alignment of interests fo the sponsors and investment team with that of the unitholders
- Downside risk in case of company-specific or market-wide issues
- Past returns and consistency thereof
A major factor that others look and which I tend to ignore is the fund performance over periods of less than 1 year. Further, I do not require the fund to outperform the benchmarks each year as in times of froth, conservative funds tend to underperform and that is fine. In 2017, a fund under-weight on small and mid-caps would have underperformed. Similarly, in 2007 a fund not owning infrastructure or real estate stocks would have underperformed. That is okay. The fund should outperform over a cycle and not each year. Investing is a marathon and not a 100-meter dash.
For Parag Parikh Long Term Equity Fund, the AMC has often said that it is for investors who do not rely on fancy algorithms or technical charts while investing. What is wrong with relying on the so-called ‘fancy algorithms or technical charts’?
At a fundamental level, a participant in the financial markets has to identify whether he/she is a trader or an investor.
A trader tries to predict where the security prices will move and accordingly buys and sells securities to make relatively quick profits. Algorithms and technical charts have a role to play in this area.
An investor in equity shares looks at buying equity shares as owning a part of that business. In this aspect, technical charts have a negligible role to play. What matters is management quality, business characteristics, company financials and so on. We look at fundamental aspects while investing and do not consider technicals and hence the statement.
Your equity fund has a portfolio turnover of about 4%. Is this by design? Why?
Portfolio turnover results in costs to investors in terms of brokerage, STT and impact costs. This is not to say that that turnover is to be avoided in all circumstances. If it makes compelling sense to sell a particular stock and buy something else, it should be done regardless of portfolio turnover. It is just that turnover should not be too frequent. We look at investing on an average for five years plus in the companies that we buy in our funds.
Given this background, I would generally expect our turnover to be less than 20% per annum. However, in given years it can be high or low depending on circumstances.
Though your cash levels have come down, they are still among the highest. We just saw a pre-election rally in India. Did you deploy money recently? If yes, where and why?
As per our recent factsheets, you will observe that we have added Hero Moto Corp as a new position and have added to our holding in Suzuki. Auto stocks have sold off recently on growth concerns and the valuations in our opinion have come to levels which are attractive from a long term perspective. We are focused on buying individual businesses (companies) at attractive valuations and are ignoring the election-related noise in the market. We do not mind buying pre-election or post-election provided the valuations are attractive.
Is the fund highly under-weight on financials compared to its benchmark Nifty 500? Why is it so?
The fund is somewhat under-weight financials. We do not approach portfolio construction with a view to under-weight or over-weight certain sectors. We buy individual companies on their own merit. The only way we consider sector weight is as a risk management tool so as not to be exposed too heavily to the fortunes of a particular sector. Hence the sector weights are an outcome of our individual stock selections rather than a starting point.
Some of your rivals say that since Parag Parikh Long Term Equity Fund is invested in global stocks, your benchmark selection is not proper. How do you respond to this?
In a lighter vein, it is surprising that any mutual fund considers a tiny fund like ours as a “rival”.
Our fund mandate is to invest in Indian stock 65% to 100% and in overseas stocks/debt/ money market securities from 0 to 35%.
Creating a customised index having some component of overseas stocks for our fund would result in having a benchmark which is not investible by the public and also not widely tracked.
Further, we may have a situation where we are not invested in overseas stocks at all. What then?
Also, let me flip the question. Even after the re-categorisation of schemes, it is permissible for large-cap funds to have up to 20% exposure to stocks which are NOT large caps. Should these funds then not be benchmarked to NIFTY and SENSEX?
Do you at all track market levels and broader valuations? If yes, what is your take on them?
Overall market valuations are at somewhat elevated levels and caution may be required.
Consumption related stocks (like FMCG) seem to be the most expensive on an absolute basis and also compared to their own past. One should guard against investing in quality at any price approach.
Lastly, you have often said that people, who get scared by volatility, cannot benefit from the power of compounding. Any tips on how should people avoid getting scared by volatility?
One way of tuning out volatility is to close one’s eyes (only partly in jest). Imagine going on a rollercoaster ride in an amusement park. If one closes one’s eyes immediately on boarding the ride and does not open them till the ride is over one will not see the ups and downs.
Similarly, people who invest and forget or keep buying their investments regularly tune out of the volatility and the investment ride does not seem so scary. In one research study, it was found that among the best investors were people who have forgotten they had investments (or were dead) and hence the compounding continued uninterrupted.
I would recommend that investors check their portfolios and NAVs maybe once a year (or maximum at 6-month intervals) rather than on a daily basis. This will help not getting scared by volatility or the day’s headlines.