As a part of the ongoing series on Know your Fund, we now bring to you Parag Parikh Long Term Equity Fund.
This from the PPFAS Mutual Fund which came in existence in May 2013 and has completed over
3 5 years (updated Oct 2018). It stands out for some of its characteristics which, in the context of current industry behaviour, appear eccentric.
The fund house offers only ONE equity scheme that is the Parag Parikh Long Term Equity Fund. There is only growth option available – no dividend or bonus option.
The scheme benchmarks itself to the Nifty 500 TRI, the broad market index that is correct for its multicap character.
It also is one of the few funds to have a mandate to invest in domestic as well as international equity/stocks. And yes, the logo of the fund house is a Turtle. We will that to the reader to find out why.
The fund was known as PPFAS Long Term Value Fund till about just a couple of weeks ago (as of Sept 2016). Investors are keen to know whether it means any change in the way the fund operates.
Thankfully, it is ONLY a name change and nothing else. As the fund house communication mentioned it was a way to pay tribute to its founder Mr. Parag Parikh.
We, at Unovest, anyways got in touch with Rajeev Thakkar, Fund Manager, CIO and a Director with PPFAS Mutual Fund to share with us the core characteristics and insights about the Parag Parikh Long Term Equity Fund.
The following is series of questions that he has graciously and generously answered for all the investors out there.
Here we go.
Q: Why does Parag Parikh Long Term Value Fund exist? What’s the purpose?
Parag Parikh Long Term Value Fund is an outcome of a quest that people at PPFAS Mutual Fund had for an investment vehicle that is:
- Operationally efficient
- Flexible to invest in a broad variety of financial market opportunities
- Evergreen and not a flavour of the month kind
- Tax efficient
- Easily accessible to investors and at the same time have ease of on-boarding clients
Basically, we created an investment vehicle that we would ourselves want to invest in and having created the same, offered it to investors.
Q: Can you help understand in detail about the investment strategy of this scheme?
The scheme has a mandate to invest in equities across market capitalisation and across sectors. It can invest from a minimum of 65 % to a maximum of 100% in Indian equities. Further, it can invest in 0% to 35% in foreign equities or in money market / debt instruments.
The aim of the investment management / research team is to invest in companies which on average have high return on capital invested, are not excessively leveraged, are run by competent and minority shareholder friendly managers and are available at reasonably attractive valuations.
Q: How do you go about picking investments for this scheme? What are the evaluation parameters for the investments you make? What kind of sectors, stocks, etc. do you focus on?
If we just add up the number of companies in the world, it come to a very large number. Obviously we do not track every company that is out there.
In India, typically we look at companies with market capitalisation in excess of Rs. 700 crores. We eliminate companies from promoters which have had a history of actions which are not minority shareholder friendly. We also eliminate sectors which do not earn more than 15% return on capital on an average across a cycle.
For overseas stocks, we restrict our investments to companies with English language reporting, from countries which have had a good history of protecting minority shareholder rights and with global operations. We typically invest in North American / Western European global multinationals. We are looking for well known companies with simple to understand businesses.
The evaluation parameters as mentioned earlier are
- Promoter / management quality
- Return on capital across a cycle
- Extent of leverage
- Competitive advantage / moat
Q: The scheme holds a significant exposure to international stocks. Two questions related to that.
One, aren’t there enough opportunities in India itself as a country?
India is a large country and economy. Still, however, India’s share of the global GDP is about 7%. In other words, 93% of the Global GDP is outside India. Surely there are plenty of opportunities outside India as well.
While we have a well diversified market, many kinds of stocks / sectors are not present in the Indian listed space. We do not have equivalent companies to Apple, Alphabet (Google), Amazon, Facebook, Tesla, Genentech and so on.
Also, whether we like it or not, we are governed by global factors. Our IT, Pharma, Auto Ancillaries are export dependent. Our metals and energy companies are dependent on global factors for prices and margins. Many companies like Tata Global Beverages, Hindalco, Bharti Airtel have global operations. Hence, one is in any case affected by global factors.
When one has a mandate to also invest globally, the opportunity set increases, ability to take advantage of valuation differentials is possible and in most cases portfolio volatility comes down on account of additional diversification possibilities.
Q: Two, with international investments you essentially add a couple of more layers of risk – forex risk as well as a country risk. How do you work to protect the downside or manage the risks related to these investments?
We do not take currency views and try and optimise Rupee returns. Towards this end, we have currency hedges to the extent of about 90% of our currency exposure by using currency futures contracts. Hence, to the extent of our hedges, the NAV of our fund does not get affected by Rupee volatility.
As far as country risk goes, putting all investments only in India is an example of country risk. In Behavioural Finance terms it is called “Home Country Bias” and readers who are interested could look up the term on the internet.
Essentially when we put all our money in Indian stocks, we are affected by the success / failure of monsoon, tensions or lack of the same with our country’s neighbours, political stability or lack thereof and so on.
When we add global stocks to the portfolio, we are in fact reducing country risk. While we are not great fans of greek alphabets, investors could look at some metrics like Portfolio Beta or Standard Deviation and look at our portfolio volatility in the past.
Q: The scheme also tends to hold cash at various times. What is the highest level of cash you can go upto? How do you put that into perspective for an investor?
In theory, we can be in money market / debt securities up to 35%. We can reduce direct equity exposure further by cash to futures arbitrage.
However, we are an equity fund and we are not into the market timing business. Cash positions are residual positions and we are constantly looking to deploy cash. We are not in a hurry to deploy and some amount of cash helps in meeting inflows / redemptions uncertainty. They also help in taking advantage of any falls that might come along.
In other words about 5% cash could be expected almost all the time. If we sell something and if we have not found an immediate replacement for the stock, cash might be higher. Investors should look at us as an equity fund (it is surely not a balanced equity / debt fund), however there might be some cash from time to time.
Q: What will you NOT do as part of managing this scheme?
At the time of the Global Financial Crisis in 2008, a head of a bank had famously said, “We had to dance while the music was playing”. This was a justification for getting involved with the Sub-prime mess and the rationale was everyone was in it.
We will not justify our actions based on momentum. We should understand a company and sector based on fundamentals and will not participate in something just because stock prices are moving up or that it is fashionable.
Q: What should investors expect from / be ready for when they invest in this scheme? The good, bad and the ugly.
When investors invest in the fund, they should know that
- The fund is suitable only for long term investing. By long term we mean a minimum of 5 years. The longer the better.
- International diversification aims to reduce risk and avail of a broader set of opportunities. It may not give the highest returns at times when the Indian markets are in a huge upswing and global markets are lacklustre. At the same time, when Indian markets are stagnant and international markets are in an upswing, the fund can be expected to do better than others.
Q: As a fund manager, how do you see India (individually and along with the world) going forward? What kind of opportunities are there currently or likely to emerge especially from an investing point of view?
We are optimistic that Indian and Global businesses will be far more valuable in the years and decades to come ahead as compared to where they are today. Rapid technological change in the world will bring new opportunities and at the same time threaten some existing businesses.
Also given the low growth, low inflation and low interest rate environment and the somewhat above average valuation numbers, one has to expect lower nominal returns from equities as compared to the past. This is not such a bad thing since inflation is under control and real rates are still expected to be good.
Thank you Rajeev for the insights and helping the investors understand the Parag Parikh Long Term Value Fund.
Would you have any further questions? Send them to us in the comments and we will get the answers for you.