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  • PPFAS Mutual Fund :: About Us :: Letter from Rajeev Thakkar, CIO

    Letter from the CIO

    Greetings!

    This year, unfortunately we at PPFAS will not have a chance to meet many of you in person. Each year we have an in-person meeting for unit holders who want to come across to meet and interact and the same is webcast on YouTube. This year the in-person meeting is not happening due to the COVID situation. However we will have an interaction over the internet. Of course it is not the same thing but we hope to have an interaction which is as engaging as always.

    Given the limitations of an online interaction, I have tried to make this letter a very detailed one so that most of the basic questions are cleared upfront.

    The number of unique investors with us has increased very significantly over the last year. Hence I think it is important to reiterate some things that long time investors know clearly by now. These points are in the section A below. Experienced investors can skip this section if they want.

    A. GENERAL POINTS


    Long Term Thinking

    Our equity schemes are designed for long term investors.

    The name of our flagship scheme is Parag Parikh Long Term Equity Fund (Scheme name has changed to Parag Parikh Flexi Cap Fund as on February, 2021). In case someone still misses the long term part, we reiterate the same in our communication 😊. An example is given below



    I have seen some chatter about timing the entry and exit in our fund for very short term horizons. The Long Term Equity Fund is an open ended scheme and we cannot stop people from buying and redeeming our units. However this will result in an exit load for redemption within the first two years of the investment, stamp duty and capital gains taxes. Such actions in my view are not very beneficial to those indulging in such actions.

    We are not superheroes and we do not have mythical powers

    Just because we have bought a stock does not mean it immediately starts to go up. When we buy, we buy with a longer term outlook usually a minimum of 5 years. The investment thesis takes time to play out.

    Last 1 year returns are NOT the norm

    Please invest with us because you like the process, the people, the scheme structure and the organisation. Past returns, especially the short term returns are misleading and should not be the reason to invest or not invest.

    No strategy works all the time

    Even excellent strategies have long periods of under performance. Unless you are clear why you have invested in a particular strategy, you may not have the conviction to see the ups and downs (more likely downs and ups) which are a part of any investment journey. It is very important to stay the course.

    Underperforming stocks

    We frequently get questions on stocks in the portfolio which have not done well. Firstly, the nature of equity investing is such that not all investments work out perfectly. There are spectacular winners, moderate performers and spectacular losers. What matters is that on a portfolio level we earn decent returns while managing the risk properly.

    Sure, we have to continuously examine our mistakes and learn from them. However no amount of diligence will give a 100% strike rate in success in stock picking.

    Whether we are successful or unsuccessful is known only over time. Pharma Stocks and Mid Cap IT names in our portfolio which were looking like duds last year suddenly became flavour of the month. At the same time some of the high flying sectors of the past like private sector banks have suddenly lost popularity. There is no magic wand which converts private sector banks into pharma stocks when a pandemic strikes. That is the reason why we have multiple sectors in the portfolio and different stocks do well at different times.

    We are patient with both the performing stocks and non performing stocks and typically do not churn the portfolio too much. We also periodically buy under performing stocks (defined as stocks where the stock price has gone nowhere or has come down in the recent past). We invest in businesses based on their fundamental characteristics rather that just take stock price signals.

    Tail Risk

    An interesting question came to the fore in March and April of this year. What if we go into a deep depression like the one that was seen in the USA in the late 1920s and early 30s? Will the equity investments with PPFAS be safe?

    It is important to realise that in the last 40 years, numerous events have happened in India and in the world. The Global Financial Crisis in 2008, two Gulf wars, a balance of payments crisis in India and big devaluation of the Indian Rupee in the early '90s, assassination of a prime minister and an ex-prime minister, terrorism attacks including 9/11, economic sanctions on India post nuclear tests, Kargil war and numerous border tensions, sectarian riots, civil unrest, political instability including minority governments and short lived governments.

    While the current crisis may seem uniquely tough, the country and the world periodically go through difficult situations. One has to witness the ups and downs of the economy, businesses, stock markets and the portfolio NAVs.

    The only protection to an extent against these ups and downs can come from asset allocation appropriate to the circumstances and the risk tolerance ability of the investor. Even asset allocation may not fully protect against tail risks. One may be tempted to think that Americans who did not participate in the stock markets but instead put all their money in bank deposits in 1929 would have been protected. However there were an estimated 9,000 banks which failed (there was no deposit insurance at that time) and by 1933 bank depositors had lost an estimated $ 140 billion on account of bank failures.

    Hence, the answer to the question is

    • Firstly, do not put short term money in equities. Equities usually recover after a crisis like situation.
    • Secondly, have an appropriate asset allocation across various asset classes like bank deposits, government savings schemes, retirement funds, equity and debt mutual funds, real estate and so on.
    • An equity fund will lose value if the underlying businesses lose value.

    B. INVESTMENT PROCESS


    Equities
    • Our research team is structured on sectoral lines. Each analyst covers the allocated sectors and the companies in that sector both in India and outside.
    • We have a defined coverage universe. We apply quantitative filters based on leverage, return on equity, market cap and so on. We only cover companies which meet our criteria.
    • We invest in companies from our coverage universe. We are neither too concentrated nor excessively diversified. Typically we invest in around 25 companies.
    • Management and promoter quality is very important. We will not knowingly invest with management which has a dubious track record.
    • We invest in companies with low leverage and a proven track record of running a business with high return on capital and equity.
    • We are mindful of the valuations we pay for the business.
    • The investment process for the Long Term Equity Fund (LTEF) and the Tax Saver Fund (TSF) is the same. However there are some differences in the portfolio construct based on the following
      • The LTEF can invest in foreign stocks up to 35%, the TSF can invest in only Indian stocks
      • The minimum weightage to Indian stocks is 65% in LTEF. It is 80% in TSF.
      • Derivatives can be used in LTEF whereas they cannot be used in TSF.

    Liquid Fund
    The primary objective of our liquid fund is to have a safe place to park short term funds and to enable Systematic Transfer Plans for our equity funds. In the current environment where there could be elevated stress on corporate liquidity, we are only investing in sovereign debt and overnight money market deployment.

    At other times as well, the exposure to corporate debt and bank CDs is small and the fund is largely in sovereign papers. We keep exposures per issuer small and do our own credit analysis.

    C. INVESTMENT OUTLOOK


    We are taking the current COVID situation in stride. As mentioned earlier, ups and downs are a part of any investment journey.

    We are taking the current COVID situation in stride. As mentioned earlier, ups and downs are a part of any investment journey.

    Our objective is to:
    • Identify businesses that have superior attributes in terms of management quality, return on investment characteristics of the business, growth prospects, low leverage and so on.
    • Be mindful of the valuations at which we buy these businesses and not to overpay for quality businesses.

    US Technology companies / Platforms

    The COVID related lock-downs have accelerated some of the underlying trends in the environment which favour these companies.

    Some of them are
    • Shift towards digital advertising
    • Shift towards cloud computing
    • Preference for e-commerce versus physical stores
    • Consumption of streaming music and video content as opposed to traditional radio and television.
    • Investments in technology to enable remote work, video calls, collaboration tools etc.
    The businesses we own are strong and have been gaining traction in the pandemic. The stock prices have also run up. We are mindful of the valuations and will not ignore this aspect in our investments.

    Borrowing / Lending businesses

    In the current COVID situation, the emphasis on low leverage is enhanced. Typically we do not invest in companies with high leverage but banks and NBFCs by the very nature of their business use leverage significantly. We have reduced the portfolio weights of such businesses in recent months. While the private sector banks and other quality lenders will gain market share in this crisis and will see improved margins in the longer run, in the short to medium term there may be elevated levels of NPAs / bad loans and hence our conservative stance.

    Non Lending Businesses / Platforms

    Depositories, Commodity and Power Exchanges, Rating Agencies, Life and General Insurance Companies etc. should be relatively immune to the troubles of the lending based financial companies and this is where we have increased allocations for fresh investments.

    Pharma companies

    Pharma companies have been doing well recently after the regulatory troubles a few years back. As before, we are invested in a basket of generic pharma companies with relatively small weights per company as a consequence of which the risk to an individual company, plant or molecule is small.

    IT Services

    IT Services companies in our portfolio have been broadly less affected than others because the nature of work is easily amenable to Work From Home. Further, there may be increased demand in certain areas to accelerate the digital transformation of traditional companies.

    Both Pharma and IT services will also benefit from the weaker rupee.

    FMCG

    FMCG companies are very resilient in this environment. We have largely stayed away from large investments here given the very elevated valuations of most companies. We have increased investments in this space in recent months where we found opportunities at a reasonable valuation.

    Automobiles

    We own some auto companies. The auto sector had been undergoing a cyclical slowdown pre-COVID. Given the current emphasis on social distancing and the consumer preference for personal mobility instead of public transport or shared mobility, we could see some demand revival in this space.

    Economy and Valuations

    There is a lot of surprise at the headline GDP numbers and the rise in stock prices. The key point to note is that markets are inherently forward looking. The fall in stock prices in March and April happened before the fall in GDP was reported. The rise in stock prices is in anticipation of economic recovery.

    A lot of fiscal and monetary measures have been implemented across the world. We are likely to be in an environment of low interest rates for many years. Given the sustained fall in the cost of capital, some amount of increase in valuation is to be expected.

    While we are mindful of the environment our investments are largely driven by individual companies rather than an overall macro view.

    Polarisation

    A lot has been made of the stock indices being driven up due to the rise in stock prices of a few companies. It should be noted that there is to some extent polarisation in profits as well. While some anti trust measures and some measures to help small businesses will be announced, it should not be too much of a surprise to see a handful of companies in some sector succeeding and the rest barely managing to survive.


    D. MISCELLANEOUS MATTERS


    A lot of time has been spent on the new circular by SEBI on Multi Cap Funds and on the Long Term Equity Fund being able to write covered call options. Both of these are non issues in my view and have been addressed separately in our communication. We will briefly mention these at our AGM but not spend a lot of time discussing these.

    I look forward to interacting with you all on October 24th.

    With Warm Regards,
    Rajeev Thakkar
    Chief Investment Officer
    PPFAS Mutual Fund
    Date: October 2020

    Parag Parikh Flexi Cap Fund - Riskometer

    This product is suitable for investors who are seeking*
    The investment objective of the Scheme is to seek to generate long-term capital growth from an actively managed portfolio primarily of Equity and Equity Related Securities. Scheme shall invest in Indian equities, foreign equities and related instruments and debt securities.

    *Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

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    Parag Parikh Liquid Fund - Riskometer

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    Parag Parikh Tax Saver Fund - Riskometer

    This product is suitable for investors who are seeking*
    • Long term capital appreciation
    • Investment predominantly in equity and equity related securities.

    *Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

    Download SID/SAI and KIM here.

    Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

    Dear Unit holders,

    Seasons Greetings!

    Ms. Aarati Krishnan asked me a question many years back. “Since you hold an annual meeting for unit holders, why not write an annual  note putting together your thoughts so that many questions can be pre-empted and there can be more structure to the Q&A?”

    I immediately acknowledged that it was a good idea but for some excuse or the other I have been putting this off. That changes this year...

    Background

    The following will be familiar to unit holders who have been with us for a while but it is worth reiterating, nevertheless.

    Unit holders are the ultimate owners of the fund. We (meaning the promoters, management, staff, directors of PPFAS) are co-investors in the fund and as a result our interests are aligned.

    We at PPFAS look at stock investing as partnering with the promoters / management of the company in the business they run. We invest in businesses where:

    • The promoter / management quality is great.
    • The business is good in terms of return on capital metrics across a cycle, which is preferably asset light, which does not require too much of leverage (with the exception of financial stocks), which is understandable and at least to some extent has some competitive advantage.
    • Finally, the valuation is reasonable or at a discount to intrinsic value.
    We are market-capitalisation agnostic, and can therefore invest in companies across the market cap. spectrum. We are also sector agnostic. However we eliminate sectors / companies which do not meet our criteria as listed above and we can invest in overseas stocks as well to the extent of 35% of the portfolio.

    Scheme offerings

    We at PPFAS run a limited number of schemes. Currently we have only one equity scheme, Parag Parikh Flexi Cap Fund with the abovementioned investing approach. Our aim is not to have a cluttered or 'flavour of the month' kind of offering. In addition to the single equity scheme, we have a liquid fund to meet cash management needs. The objective here is to manage liquidity and not generate the 'highest returns'. Given this stance, the bulk of investments in the liquid fund are in overnight money in CBLO or in Treasury Bills. Going forward, our plan is to introduce an Equity Linked Savings Scheme (Tax saving scheme) probably in the next financial year.

    Investment horizon

    We recommend investors in the Equity Scheme to have a minimum investment horizon of 5 years. Why do we do that?

    To answer this, let us look at the following data.

    In the last 20 financial years (March 31, 1998 to March 31, 2018) the Nifty 50 Index has given a return of 11.65% p.a. on an average. However, good luck to anyone wanting a similar return over any one year period!

    Given below are the one year returns on Nifty over the last 20 years. The interesting point is that only in 4 financial years out of 20 namely 2017-18, 2010-11, 2006-07, 2004-05 have returns been anywhere close to the average returns. In all other cases, the returns have been all over the place. In fact in 7 of the 20 years, returns have been negative.

                                             1 Yr Returns              
    2017-18 10.25%
    2016-17 18.55%
    2015-16 -8.86%
    2014-15 26.65%
    2013-14 17.98%
    2012-13 7.31%
    2011-12 -9.23%
    2010-11 11.14%
    2009-10 73.76%
    2008-09 -36.19%
    2007-08 23.89%
    2006-07 12.31%
    2005-06 67.15%
    2004-05 14.89%
    2003-04 81.14%
    2002-03 -13.40%
    2001-02 -1.62%
    2000-01 -24.88%
    1999-2000 41.78%
    1998-99 -3.48%
    Source: www.nseindia.com


    A simple point which gets ignored by equity investors is that to get average returns from equities, one has to average the returns over many years. One cannot hope to get the average returns in any one particular year.

    An investment horizon of 5 years is not a silver bullet or a magic potion curing all ailments. However an investment horizon of 5 years reduces the chances of negative returns and even the magnitude of negative returns. In the case of rolling 5 year returns over the last 25 financial years, the number of negative periods fall to 2 out of 20 and even in those two periods, the maximum negative is 2.62% per annum as compared to negative 36% annual return as seen in the above table.

    Howard Marks' latest book “Mastering the Market Cycles” is an excellent read on the cyclical nature of investments.

    Secret to happiness

    Charlie Munger has said that the secret to happiness in life is to have low expectations. The simple point I am making is that NIFTY 50 has given a price return of about 11.65% and even adding say 1.5% for dividends the returns are in the vicinity of 13%. I see many equity investors assuming returns of 15% to 20%. While there is nothing wrong in working hard and researching thoroughly and aspiring for higher returns, assuming that the market owes us those high returns because we are smart or hard working is fraught with risks. It is better to have low expectations and then beat them rather than assume high returns and find that our savings are not sufficiently large enough to meet our financial goals.

    Direction vs. Speed

    Is the fastest mode of transport to your destination always the best? In our view not necessarily. Say, you are flying from Chennai to Delhi. On the normal path there is some weather turbulence and your pilot decides to take a detour on account of safety and comfort considerations. Due to this, you reach your destination 30 minutes later than the scheduled time. Some other pilot of another airline decides not to take a detour and reaches safely and on time but with a lot of scary moments for the passengers. Is the second pilot better?

    Say one is driving from Mumbai to Pune. The speed limit on the expressway is 80 kmph. One cab driver honours the speed limit and reaches the destination in proper time. Another driver drives at 150 kmph and reaches early without an accident. Is the second driver better?

    Many a times in our day to day lives, we choose a slower path on account of various reasons. Many people choose cruise ships or road trips or train journeys vs. air travel to enjoy the journey rather than just reach some place. Again for a long haul, air travel may be the best route.

    Investments are just the same. What matters is an enjoyable journey (less volatility), safe journey (avoid permanent loss of capital), the right destination (does the investment help you meet your financial goals) and reasonable speed (returns). Focussing only on one parameter of returns is not the optimal course.

    Watch Anthony Deden's interview on YouTube (two and half hours) for an excellent perspective on the topic of destination vs speed, permanent / irreplaceable capital and other topics).

    Which market will do well? Indian or overseas?

    We keep getting asked this question. We do not look at it that way. Our investments overseas are to get a wider opportunity set as well as to potentially lower volatility. Nothing more nothing less. It is not that we are bullish / bearing on India vs. overseas stocks.

    What is our exposure to currency movements?

    Bulk of our exposure to currency (80%-90%) is hedged using Dollar Rupee futures contracts. Hence we do not benefit or lose too much on account of Dollar Rupee movement on a day to day basis.

    Why hedge the currency when Rupee usually depreciates?

    When we hedge the currency risk, we get paid to do so! Typically the Rupee trades at a discount in the futures market and hence the benefit we would get from Rupee depreciation in a lumpy manner comes to us on account of the futures discount in a somewhat steady manner. As of the date of writing this letter, the future discount / hedging income is about 4% p.a.

    Is being in cash equivalent to 'market timing'?

    We are all for being fully invested in equities provided one is convinced of the opportunities on hand. However sometimes it so happens that nothing on offer seems compelling and in such cases we would rather be in cash or arbitrage positions waiting for opportunities to come by. We are not predicting election outcomes, interest rates, trade wars (or lack thereof), oil prices, geopolitics and so on. We just want an attractive bottom up stock pick to deploy cash and if one is not available, we stay in cash. Some people call this market timing. Regardless of the label, this is what we do. This is painful in runaway bull markets (like in 2017) and looks good in 2018 kind of scenario.

    We are excited by the possibility of full deployment in the coming days and months given that there has been a significant fall in some stocks in the past few months.

    Does it mean that everything is attractively priced? Surely not. In fact stocks in our favourite hunting ground – the FMCG space and consumption related stocks are at still valued at a significant premium compared to their past.

    FAANG stocks

    A question repeatedly asked is our view on FAANG stocks (Facebook, Apple, Amazon, Netflix and Google – now Alphabet). This is given the fact that we own Alphabet and Facebook and in the past have owned Apple. Our investments in these companies has nothing to do with the popularity or otherwise of the acronym or any theme. It is just that on a bottom up basis, these companies looked attractive investment opportunities. In fact we do not understand how to value Netflix and Amazon and currently may be erring on the side of caution by not buying Amazon. (A few friends in the technology space and who are great investors in their own right and who I respect a lot have been drilling into me that Amazon is a bargain. They have make some points which were new to me and I have conceded that some points they make are very valid. We have however not yet given in, and consequently, have not yet invested in Amazon).

    Given the shift towards digital advertising and media consumption and the large addressable market for Alphabet and Facebook we continue to remain invested there.

    Risks of Privacy / Anti-Trust

    Privacy concerns and Anti-Trust regulations are risks to both Alphabet and Facebook. However any strong business will eventually face public scrutiny and attention from regulators and media. We will monitor these risks.

    Is there a bubble in Tech. stocks?

    Probably there is. Given the large outperformance of technology related stocks, there are surely many bubbles out there. The startup space is increasingly looking like we have gone back to the dot com boom era. However the larger companies like Apple, Alphabet, Microsoft and Facebook have real sales and are cash generating machines and are not looking like they are in a bubble.

    The bubble in my view is in the startup / unlisted unicorn space and in some futuristic concept stocks rather than in somewhat mature technology companies.

    Private sector banks

    What is common between the tobacco business, alcohol business and the banking business in India? All of them require licences to operate (which are hard to come by). Given that about 2/3 of the banking sector is with the government run banks and that they are going through their own turmoil, well run private sector banks have a good runway in a growing economy where they participate not just in secular growth but also gain market share. The bulk of our investment is in HDFC Bank and with smaller investments in Axis and ICICI. While there have been governance concerns in the latter, they are also under continuous public scrutiny. We think that the retail franchise of these banks is intact and that their woes on the corporate lending side should be resolved in the coming years. In a rising interest rate environment and an environment where NBFCs are viewed with suspicion, CASA (current account / savings account) rich banks with low cost of deposits will have a structural advantage going forward.

    IT and Pharma companies

    There are many IT and pharma companies with good governance and good businesses. However both sectors have been facing headwinds in the past.

    IT companies have been facing a rock steady currency (which has changed with the Rupee depreciation of late) and increased automation and shift to newer technologies. However the need for investment in IT and the need for service providers to execute the plans will remain.

    An IT Services company CEO gave me this interesting perspective. “Dominos is a pizza company but has implemented online / smartphone ordering of pizza, Similarly, all retailers, financial services companies, airlines and other traditional companies have to have a digital strategy. Cloud computing, Software As A Service (SAAS), Social Media or Mobile computing will not take away the need for IT services companies as they will need someone to implement these. Not every company will have computer engineers on their payroll.”

    We are invested in a few IT Services companies that we like.

    Pharma companies again have been facing headwinds of pricing pressures, quality issues at the plant level and currency. Most of these headwinds are getting resolved.

    In Pharma, given that company level and product level uncertainties are high, we have been investing smaller percentages in individual companies and have a basket of well run companies rather than taking big positions in individual companies.

    FMCG Companies / Consumption stocks

    There are many well run companies in this space but valuations here have been priced to perfection. On account of this, the weightage in this space for Indian stocks has been low for some time. Of course we own some global stocks and a couple of Indian stocks here.

    Automobiles

    Given the low penetration in India and the market dominance of some players in the 4 wheeler and two wheeler space, we have a few investments here. We are cognisant of the rapid changes happening on account of ride hailing / sharing, electrification, autonomy and will monitor developments and their impact on our investments.

    Market environment / Outlook

    What will markets do in the coming months? No one knows. At best we can attempt to look at where valuations are. Given the steep fall in some stocks, it is becoming an interesting time to start investing fresh money. As always there will be pockets of undervaluation and pockets of overvaluation. The one caveat the I have while looking at valuations is that we have been so used to falling / low interest rates and ample liquidity for a long time that the valuations seen in the recent past may not be representative of more normal valuations and may be an aberration. It will be unwise to get anchored to those and to guard against the contract effect.

    Our entire team and I look forward to interacting with you at our forthcoming annual unit holders' meetings in person or via the online streaming interaction.

    Thank you for investing along with us.

    With Warm Regards,

    Rajeev Thakkar
    Chief Investment Officer & Director
    PPFAS Mutual Fund
    Date: 25th October 2018

    Parag Parikh Flexi Cap Fund - Riskometer

    This product is suitable for investors who are seeking*
    The investment objective of the Scheme is to seek to generate long-term capital growth from an actively managed portfolio primarily of Equity and Equity Related Securities. Scheme shall invest in Indian equities, foreign equities and related instruments and debt securities.
    high riskometer
    *Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

    Download SID/SAI and KIM here.

    Mutual Fund investments are subject to market risks, read all scheme related documents carefully.


    Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
    © 2021 PPFAS Asset Management Private Limited. All rights reserved.
    Sponsor: Parag Parikh Financial Advisory Services Limited. [CIN: U67190MH1992PLC068970], Trustee: PPFAS Trustee Company Private Limited. [CIN: U65100MH2011PTC221203], Investment Manager (AMC): PPFAS Asset Management Private Limited. [CIN: U65100MH2011PTC220623]