5 questions for Parag Parikh Flexi Cap Fund

5 years ago when I started discussing about Parag Parikh Flexicap Fund with investors, I met with deep suspicion. “I have never heard about this fund.” “Will they run away with my money?” “Are you sure we should invest our money with this fund?” “What is their track record?“

The fund was as unique then as it is now. It started as the only equity fund from a fund house. In fact, it was the only scheme from the fund house for many years. It was and is a multi cap fund with a mandate to invest anywhere in the world yet retaining the tax benefit of an equity fund.

Even though it invests in international stocks, it doesn’t aim to benefit from USD-INR depreciation. All its exposures are hedged. So international holdings are pure investment decisions.

Patience continues to be its forte with minimal churn in portfolio and it is not afraid to hold cash (arbitrage, money market, etc.) when market prices move too far away from the reality of cash flows.

The fund has reduced its expense ratio over time- currently the ratio stands at 1.1% for the direct plan.

The unique flavour of the fund has helped it buck the trend. It recently touched its all time high.

Now, I get messages and calls from the same investors to share their appreciation.

Well, this is not to toot my own horn. My work is to simply understand various investment options, find out if they offer something unique and determine how can they make sense in an investment portfolio.

It is an ongoing effort.

Today we make a quick revaluation of Parag Parikh Flexicap fund.

I got in touch with Rajeev Thakkar, CIO of PPFAS AMC and posed 5 questions that, as investors, you and I have on our minds.

Let’s find out.  

VK: In the time period I have been tracking the fund, this is the first time I saw the fund fully invested. How did you manage to see opportunity when survival was the only thing on everyone’s mind?

RT: The key is to focus on valuations relative to sustainable earnings power rather than focus on events or near term headlines. In 2017 when everything was looking fine, valuations were haywire and hence we were in cash. In March and April of 2020 valuations had become very attractive and hence we chose to deploy funds.

It has been argued that one does not know what the earnings will be and hence valuations are uncertain. This is true if one looks at a single year’s earnings, say 2020-21. However, in equity investing one has to look at the long term earnings prospect of a company rather than any quarter or a year.

VK: The current portfolio (as of June 2020) looks highly diversified across sectors and multiple companies within sectors. Now, there was a time when Alphabet was 11% of the portfolio. Now the max to a stock is about 9%. Is that in response to the uncertainty of the times? 

RT: Individual stock weightage vary over time due to many factors. One factor is the stock price of a company as compared to other companies in the portfolio. One other factor that results in weightage change is the additional fund inflows or outflows. We may also not add to existing stocks when we get fresh inflows if the stock valuations are not very attractive. Hence, not too much should be read into changing weightage. 

Parag Parikh Flexicap Fund – Top 10 Holdings as of June 2020; Source: Fund Factsheet

VK: I agree. Now, a couple of years ago, we spoke about Amazon and why is it not a part of the fund’s portfolio. At that time, you mentioned that Amazon is a company that has too many moving parts and it is difficult to value it. Hence, it was not a part of the portfolio.

As of today, Amazon is the largest holding in the Parag Parikh Flexicap fund’s portfolio. What changed between then and now?

RT: Nothing much has changed in Amazon, it is just that we appreciated the attractiveness of their cloud computing business better after discussions with a few people in the sector. 

VK: OK. I know you don’t like to discuss individual stocks. But this is following from the Amazon case. I see something similar playing out with Microsoft. Is it not too late an exposure or the current environment has made it more attractive?

RT: It is a fair question to ask since these companies are trading around USD 1.5 trillion market capitalisation. Amazon and Microsoft put together would be worth more than all the listed companies in India, for perspective. A question naturally comes to the mind is that how much bigger can these companies get.

On the other hand, the trends of shift in consumer behaviour and corporate IT behaviour is still in the early stage. For example, e-commerce can be considered nascent in India and even in developed countries like the US, e-commerce is far smaller than offline retail and there is market share to gain. The shift towards cloud computing is in its early stage based on the data that is out there. We are mindful of the large sizes of these companies but we believe that the opportunity set is also large.

VK: There are murmurs with investors that the current markets are driven by liquidity alone without any fundamentals backing them. They want to book some profits and use the cash to reinvest later.

Now, as I understand your fund holds cash / books profits when markets become frothy. If investors try to do the same, it is going to be a duplication of the effort, which can leave them behind. To me the fund is going to act when required. What do you have to say to it?     

RT: Sure, there is plenty of liquidity and it helps a lot in driving up stock prices. Also, there are clearly pockets of frenzy where penny stocks or stocks of bankrupt companies or fancied names are driven higher without any fundamental backing.

However, it would be a mistake, in my view, to hold cash or to try to time the market because of this. Apart from liquidity, what has happened is that world over interest rates are at record low levels and as any finance professional knows, lowering the discount rate (interest rate / cost of capital) drives up the Net Present Value or the Discounted Cash Flow value.

In non-technical terms, let us do a thought experiment. Let us say you are a pension fund manager or a manager of a university endowment fund in US / Europe. Would you buy government bonds at 0.6% p.a. for 10 years in the US or yielding – 0.45% (yes that is MINUS 0.45%) p.a. in Germany for a 10 year bond or buy a stock like Microsoft which trades at about 30 times earnings and can grow those earnings over the years?

VK: Interesting question. I will leave it to the readers to share their answers in the comments section. Thank you Rajeev for this interaction.

Disclaimer: This note is only for educational purpose. This is not an investment recommendation. Disclosure: I am an investor in this fund.