Investing requires a lot of self discipline says Parag Parikh, Chairman and CEO, PPFAS Asset Management Private Ltd, in this interview with Chirag Madia where he shares his view on the way to go with equity investing
Does your approach to investing such
as stock picks and your portfolio vary
as individual investor, manager of a
PMS account and a fund manager?
No. It remains the same. My
portfolio is quite similar to that of
, as
the scheme comprises the lion’s
share of my equity exposure. The
same applied to the PMS too. The
current value of my and my team’s
holdings in our scheme, is
approximately ₹27 crores. We felt
that investing in the scheme was the
best way to demonstrate our
intention of aligning our interests
with those of our investors. I feel
that a key failing of the mutual fund
industry is its skewed incentive
structure based on the amounts of
assets managed. Hence the stress
has often been on asset gathering,
rather than asset management, as
the remuneration of fund personnel
depends more on the former, and less
on the returns generated for
investors. Also, their holdings in the
schemes managed by them, are often
miniscule. This erodes investor
confidence even further. We are
attempting to redress this, by not
only investing, but by disclosing our
holdings every month.
Also, we are very clear that, we
are not here to chase assets under
management (AUM). That is why we
will not launch any equity scheme
in addition to Parag Parikh Long Term Equity Fund. As a mutual fund our
job is to manage investors’ money
and make them wealthy over the
long-term. We are the only fund
house in the country which states
that investors with an investment
horizon below five years should stay
away. As we want to dissuade those
with a short-term outlook.
Does the macro economic or political
outlook have a bearing on your
portfolio? Does it impact the cash
position)?
Rather than getting bogged down
by macros, we prefer to focus on
investing in fundamentally sound
businesses at reasonable valuations. We like
businesses that are run by credible
management, have pricing power, have low
debt and are relatively easy to understand.
This analysis is overlaid with the
application of behavioural finance
principles and strategies. My experience
tells me that to be successful in the stock
market one has to keep one’s emotions under
control and take a cue from other people’s
emotions so as to benefit from it. I would like
to sum up in a quote by Warren Buffet that,
“Be fearful when others are greedy and
greedy when others are fearful”...Easier said
than done, of course.
I feel that a key failing of the mutual fund industry is its skewed incentive structure based on the amounts of assets managed
What are the essential dos and don’ts while
managing your equity fund?
There are processes which we follow, as I
said earlier. Apart from that, we don’t chase
fancy stocks nor are we dogmatic about
having a fixed allocation to certain sectors. I
strongly believe that, when you buy fancy
stocks you have to pay fancy prices and soon
you will end up with a fancy loss when the
fancy ends. Warren Buffet sums it aptly
when he says that ‘Investing is simple, but
not easy’. In other words, while investing is
not rocket science it is tough, as it requires a
lot of self discipline. The challenge for
investors is to not get carried away by the
noise in the market. Finally, while we will
not purchase at absurd valuations, we also
do not believe that there is any one perfect
moment for a purchase. Hence, we do not
place too much premium on market timing.
What kinds of stocks make inroads in your
portfolio?
We look at companies that are innovative
and having a sustainable business model.
Take a simple example; we were buying
fast moving consumer stocks (FMCG) way
back in 2003 when others were busy buying
IT stocks. That strategy resulted in
dwindling in assets for our PMS as clients
redeemed the money, as we didn’t have
exposure in IT. But that approach stood the
test of time as we remained the beneficiary
when the IT bubble burst.
We don’t get an opportunity to buy
fundamentally sound companies everyday.
Hence one has to keep those stocks on the
radar and strike it when they are trading at
cheap valuations. As the aphorisms goes
‘Fortune favours the prepared mind’. The
market is made up of sentimental fools and
you always get an opportunity to buy good
quality companies. Opportunities will
always comes one should never lose the
patience in the markets.
What kind of stocks never enters your portfolio?
As a rule, we avoid companies whose
managements have a history of being unfair
to minority shareholders. Also, as stated
above, we usually steer clear of stocks which
are in vogue, and consequentially,
overheated. As a steward of capital, we
cannot justify investing in companies or
sectors where we would not invest our own
money. For instance, we feel that the
financial statements of real estate
companies hide more than they reveal.
Hence it is hazardous to include them in the
portfolio. For us, both, preservation of
capital and reasonable return, are
important. We have to go by the law of the
farm, you can’t reap tomorrow what you
have sowed today.
Some of your value bets like Maharashtra
Scooters and Noida Toll Bridge are testing the
investor’s patience. When in your view these bets
are likely to fructify?
I don’t know when it’s going to fructify, but I
know that Noida will be debt free in a year or
so, and could begin distributing outsized
dividends to its shareholders, soon
thereafter. The bridge is already built. No
further capex is anticipated. Maharashtra
Scooters is a proxy on underlying Bajaj
group companies, even assuming that the
discount of 75 per cent does not close out, the
shares will appreciate as the underlying
companies appreciate. If the discount closes
out or narrows it is a lottery in the offing.
Both these have been testing the patience of
investors for a while now, but we are
convinced about their intrinsic
attractiveness.
What is the basis of picking the foreign stocks for
your portfolio?
Every foreign stock that we have purchased,
has given our investors an opportunity to
participate in a company which has a moat
or unique proposition that cannot be
obtained through the purchase of Indian
companies or even the Indian subsidiaries of
these same foreign companies. Sometimes
(as in the case of Nestle) it is a valuation
play, as the foreign parent can be purchased
more cheaply than the Indian arm.
Buying a stake in parent companies
eliminates the royalty and other transfer
pricing issues that we have seen in Indian
subsidiaries. Also, since the foreign parent
has various global arms, any impending
slowdown in the Indian market could be
offset by compensatory performance in some
other part of the world, which will be
reflected in the global P&L account.
Finally, as 90 per cent of the foreign
exposure is hedged through exchange traded
currency futures contracts, instead of
bearing a currency risk, our scheme actually
earns 7-8 per cent. This is because, the USDINR
‘Forward’ / ‘Futures’ rate is always
higher than the spot rate in order to reflect
the inflation or interest differentials between
the two nations. Only the residual 10 per cent
of the foreign exchange denominated
portfolio is affected by prospective changes in
the value of the USD-INR rate. On the whole,
our scheme offers more economical and taxefficient
route to foreign investments as
compared to the feeder funds offered by many
other mutual funds.
We like businesses that are run by credible management, have pricing power, have low debt and are relatively easy to understand
Following your approach which you believe in,
what are the kind of opportunities you will miss?
It is difficult to say ‘a priori’ as to which
opportunities we will miss. That will only
be known in hindsight. While not jumping
onto a particular bandwagon may lay us
open to accusations of ‘errors of omission’,
I am confident that over the longer term,
our unit holders will be glad that PPFAS
Long Term Value Fund was fearful when
others were greedy.
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