In Ramesh Damani's special show Wizards of Dalal Street on CNBC-TV18, Rajeev Thakkar, CIO & Director at Parag Parikh Mutual Fund shares details of how the portfolio management services company came to be in the mutual funds business and his learnings from ace investor Parag Parikh.
Parikh, Thakkary says taught him the importance of psychology in valuing equities. An author on behavioural finance, Parikh lectured at various places and was well-read on everything research on behavioural finance, he says.
Thakkar says the key reason for moving into MF is the RBI and Sebi regulations restricting provision to manage foreign equity investments. Under PMS, they could only send research to clients but were not allowed to execute any trades. Moving to MF helped overcome that challenge and also had simplicity in terms of accounting and taxation. In 2013 Parag Parikh moved to a fund structure.
Below is the verbatim transcript of Rajeev Thakkar's interview to Ramesh Damani on CNBC-TV18.
Q: Let me start you in 2003, you were in the fixed income side of things and you had this 'AHA' moment what was it about?
A: I started my career in financial markets in 1994 and 1994 to 2003 was something like a jack of all trades, investment banking, corporate finance, bonds various things. 2003 some colleagues of mine, myself and Parag Parikh we were sitting together and discussing stuff and the people in charge of client investments they said we have had a terrific run in bonds. We have made north of 20 percent on our bond funds. 10-year government bond yield had fallen from 14 percent to around 5 percent at that point in time.
Q: Inflation had come down, interest rates have come down, so bonds value had risen dramatically at that time.
A: I said good for you, it has been a great run but have you thought about what happens in the future. Like bond yields are already at 5 percent. Even if they stabilise here you will make 5 minus a fund management charge 1 percent, so 4 percent per annum. Whereas equities are yielding you 10 percent plus in some cases, Hero Honda ₹ 180, ₹ 18 dividend per share also growing, so why are you still in bonds. That was a collective AHA moment for the firm and we said that allocations need to change.
Q: So, they put you into equities at that time?
A: They did. They said this is something interesting that you are saying, if you are so convinced come with us talk to clients and let us get money in equities to manage rather than bonds.
Q: It was extremely rare for equities to yield more than bonds. Typically, the relationship has been the reverse. However, all this good fortune of high yielding got caught up in a bull market but by 2007 value had disappeared?
A: Value was still there in pockets, but that was not what was moving. 2007 was extremely difficult for us. The stocks that were moving were from commodity companies, they were from infrastructure companies and we had listings of DLF and you had Unitech in the run up and all the other real estate developers. We were not participating in either of the three sectors, we had a huge underperformances on hand and some of the newer clients were jittery in turn some of our RMs were jittery. So, that was the time when Parag Parikh stood behind us saying we will do what we understand, we will not get swayed by what is popular and if someone wants to redeem so be it.
Q: You took the call if they want to redeem you let them redeem?
A: Yes, we let them redeemed.
Q: It is very rare thinking in a mutual fund industry, but let me talk about your funders. I know there are two people who have had disproportionate influence on the way stocks are selected. Talk to me about these two people and how did they influence you and is there a continuing influence that you feel every day?
A: 2001 when I joined this company and 2003 when I moved to equities between that period we had good conversations with Chandrakant Sampat. He was the person who brought forth the merits of looking at quality, quality in terms of management, quality of the business in terms of entry barriers moats ---04:12 and also the capital efficiency part where the company needs to generate high and sustainable return on equities (ROE) rather than just go on creating fixed assets and earnings subpar returns.
Q: Asset-light models?
A: Asset-light models was what he loved.
Q: He taught you that, what did Parag Parikh teach you?
A: Parag Parikh is an author on behavioural finance. He has lectured various places, he has read probably everything that is there in terms of research on behavioural finance and he taught the importance of psychology in valuing equities.
Q: However, in 2010 looking ahead you had another what is now become famous in your firm another ‘AHA’ moment what was that moment about?
A: The things that we had bought in 2007-2008-2009 things like FMCG stocks, pharma stocks some mighty companies they came into fancy. From undervalue to fairly value to what we thought at that times somewhat over valued of course they went up even after we sold a bit, so we started lightning up on those companies those sectors and we were left with cash.
What was puzzling was that Indian companies were trading at very expensive valuations, what some would call nose-bleed valuations whereas the parent companies abroad were trading cheap.
Q: Very modest.
A: So, 3:00 am for example in India was at triple digit price to earnings (PE) whereas the parent would trade at somewhere about 15-16 times earnings. So, that is when we started exploring investing in overseas stocks.
Q: They say necessity is the mother of invention, so, here you have a PMS structure where it is hard to express yourself in foreign stocks. So, you decided to convert your PMS then into a mutual fund. Why did you do that?
A: Under PMS, there is no provision to manage foreign equity investments under the RBI liberalised remittance scheme. RBI allows it but under Sebi, we can’t manage it. So, we were sending research to clients, they were executing the trades but we were not able to manage client investments.
We would have been able to do that if we were having a mutual fund structure. So, that was one of the reasons to look at a fund structure. Also, on-boarding clients, accounting and taxation wise simplicity, various factors led us to apply for a mutual fund licence and 2013 is when we shifted to the fund structure.
Q: So now an Indian investor can be truly diversified across countries also with this structure?
A: True. What it does is, it opens up avenues and at the same time volatility comes down. So, for example, this demonetisation thing affects the Indian component, it doesn’t affect overseas. So, the portfolio volatility also comes down dramatically when this happens.
Q: Let us talk about some of the stocks that you have pioneered, the foreign stocks, international stocks that you have pioneered. The one that caught your eye very early on was Google and now it is offshoot Alphabet. What got you interested in that stock?
A: It was 2011, I was at the Berkshire Meet and Charlie Munger was asked, what is the most significant thing that you read in the last year and he looked at the person asking the question and said probably I will never get to use it in my investing but it is amazing what these engineering cultures are doing in terms of changing the world and creating values and he was referring to the book ‘In The Plex’, the story of Google.
Q: The story of Google and Google Plex is where they create all this magic?
A: Yes, so, immediately after the meet got over, got on to the kindle, downloaded the book and went through it. It is actually amazing, the kind of things that they have done to create a moat and to have this kind of advantage. In so many products, they are the number one and the number two is a very distant player whether it is search engine, whether it is email, YouTube, maps, android. So, the kind of moat is amazing and all these products work together.
Q: And yet it was cheap?
A: Yes, it was much cheaper than some of the FMCG, pharmaceutical names that we had sold. It was somewhere about 17 times earnings when we bought it net of cash.
Q: However, give me an example of something domestically where you put all your learning’s together from your founders, from yourself and expressed it in the form of a stock?
A: We own Zydus Wellness for example.
Q: Sugar Free guys?
A: Sugar Free guys, Everyuth face pack and things like that. So, these guys are into selling products which are substitutes. So, Sugar Free is a substitute for sugar and Nutralite is a substitute for butter. So, anyone who gets diagnosed with a sugar condition or a cholesterol problem becomes a customer more likely than not and then stays on as a customer for life.
So, sticky kind of business and again they have used market shares, in Sugar Free for example, their market share is north of 90 percent. So, it looks interesting and given that a lot of people have these conditions but are not diagnosed, so, as and when people start figuring out that they have health issues, you could see the customer base growing.
Q: I know your life changed on May 3 2015, tell me what happened on that horrific day?
A: We had gone for the Berkshire meeting, Parag Parikh, Geeta Parikh, myself and my colleague Ronak. The meeting was over on Saturday and this was Sunday morning, we were going to drop Parag and Geeta to the airport -- they were flying out to San Francisco and on the way we met with an accident. Parag passed away in that, Geeta was severely injured.
Q: It was one of the darkest days of Dalal Street that I have seen because he was always a part of our lives, friend, acquaintance, colleague and passed away in an instant. However, how do you continue the legacy of Parag? Is there something that you have learnt from him that you imbibe in your new colleagues almost every day?
A: Luckily for us the staff turnover has been extremely limited. People who have been with us, have been with us for decades; not just one or two years. So, I have been here 15 years now and a lot of other people have been around for long. Neil, his son has been there more than 10 years now.
Q: DNA is already a part of that firm?
A: DNA is there and once he crossed 60, he had started transitioning. In the sense he was not hands on in a lot of areas, he was maintaining people, he was looking at his golf, travel, spiritual side and he was building an organisation where people can function on their own.
The original article could be seen here.
