In an interview with Mutual Fund Live, Mr. Rajeev Thakkar- CIO PPFAS Asset Management Private Limited talks about the flagship fund, the Parag parikh Long Term Value Fund at PPFAS , where he has his skin in the fund too!
MF Live: Parag Parikh Long Term Value Fund (PPLTV) as named after the founder, is the flagship fund of PPFAS Asset Management Private Limited (PPFAS AMPL). The fund is a diversified equity fund which allocates 35% of its funds to foreign stocks. Please throw more light on how you have strategized the overall investments in the fund?
Mr. Rajeev Thakkar: The Foreign allocation is to allow us to invest in any geography in search of good businesses at a reasonable valuation. That doesn't mean we have to, we can be fully invested in the Indian equity market whenever the opportunities arise. The foreign investments diversifies the home market risk & also allows us to own businesses that we won't find in India, like Alphabet Inc, Apple Inc, UPS Inc, etc. The philosophy for investing in domestic as well as foreign stocks remains the same; expect that we hedge the foreign currency exposure upto 90% of the value. This enables us to ignore the currency movement & focus only on the capital returns & dividends from the stocks we own.
MF Live: The foreign portfolio of the fund comprises of almost 30% of the total invest-ments. What is the rationale behind investing in foreign stocks where India is considered to be a growth story in times to come? What has been the stock selection strategy for these stocks? How do you value these stocks?
Mr. Rajeev Thakkar: The stock selection criterion is similar to the way we invest in Indian stocks. The business should have competitive advantage, should have history of great per-formance & good management & it should be available at a reasonable valuation. We value these stocks with the same quantitative & qualitative parameters as we would value any business.
MF Live: What is the strategy for picking up domestic stocks in the funds? What are the parameters for investments you make? How is the domestic portfolio of the fund posi-tioned in terms of sectors and stocks?
Mr. Rajeev Thakkar: The strategy remains the same, businesses run by competent manage-ments, with some competitive advantage & reasonable valuation. The portfolio positioning across stocks & sectors can be found in our factsheet which is updated every month.
The fund's positioning remains the same; we will have a reasonably focused portfolio of great businesses. We want to own great, global businesses irrespective of their country of listing. Our endeavor will always be to find more such businesses and avoid too much churn in the portfolio by holding on to them for a reasonably long time or as long as it makes sense to own them.
MF Live: How have the Domestic component and the foreign component of the fund performed since the inception of the fund? Can you explain the same in numbers?
Mr. Rajeev Thakkar:The domestic & the foreign holdings keep balancing each other at dif-ferent times. There will not be a single stretch where one market dominates in returns, over the other. We always advise to look at the overall portfolio as it eliminates that noise.
MF Live: An advisor has to look at various parameters while analyzing the fund. One such parameter is the portfolio turnover ratio of the fund. The portfolio turnover ratio for our readers we would like to mention is a measure of how frequently assets within a fund are bought and sold by the managers. Parag Parikh Long Term Value Fund has a low portfolio turnover ratio. Can you please take advisors on how important it is to look at the portfolio turnover ratio and its implications? Also, is there any ideal portfolio turnover ratio?
Mr. Rajeev Thakkar: The portfolio turnover ratio as you correctly mentioned is the frequen-cy of buy / sell transactions in the fund. Portfolio Turnover ratio is mainly driven by two factors; clients and actions taken by the fund manager in the market. Clients drive it when there are inflows or outflows in the scheme. When the scheme has good amount of inflows the fund manager will buy stocks which will lead to higher turnover ratio and similar will the scenario when investors redeem from the fund, where the fund manager will have to sell the stocks which will result in high turnover ratio.
Fund managers actions can simply be explained that churning may sometimes be required looking at market conditions and valuations. For example let's say we buy 20 stocks and those 20 stocks are going in line with corporate earnings and valuations are also fine. Then we may not churn it for next 3-5 years. If a situation arises where all the 20 stocks we have bought go to extremely high valuations, in that case just to maintain a low portfolio turnover ratio, we will not continue to hold something which is overvalued. We may then sell the stocks we have bought earlier and buy something else.
Portfolio turnover ratio if seen in isolation can be misleading. As a long term investor, it naturally means that we will stay invested in our ideas for a long time. Good businesses & good valuations are hard to find. So we prefer to stay invested as long as we feel that the business can continue to perform & have a long runway ahead of it.
MF Live: The Indian investors have high expectations when it comes to returns in equity. What is it that the advisors should communicate to investors when it comes to understanding returns in stock markets? Also, how should one correlate returns to interest rates, growth & inflation?
Mr. Rajeev Thakkar: It is important for advisors to educate investors to focus on real returns rather than nominal returns. When rates on FDs were 10% inflation was in the range of 8%. Hence real return on FDs then was 2%. Look at it today where FD rates are ruling between 7-8% and inflation is running at 5-6%. So the real return from FD even today is 2%. With equity having risk element, one should expect 4-5% higher returns than fixed income security.
Again, when we talk about growth we are referring to GDP growth, meaning the aggregate value of goods and services used in the country. Every growing sector need not be profitable for equity investors, an example we have seen is the airline companies. More planes, more passengers have contributed in GDP growth which meant more goods & services consumed in the country, but it was not resulting in profitable growth for shareholders. So growth again would be two kinds one which does not create value for shareholders and the other is which create value for the shareholders. Growth in isolation will not mean much; it would really depend on whether return on capital, return on equity is good.
Expecting higher returns is natural for the investor but chasing returns at any cost must be avoided. Returns depend on what valuation we pay for the business, across various valuation parameters. In a portfolio, some investments will do better than others. In short, volatility in portfolio performance doesn't mean consistent returns in the long run. For consistent re-turns we have to go back to the basics, don't overpay, find good businesses to invest in & stay invested till it makes sense.
Macro data points like interest rates, growth & inflation are important but it is more im-portant that the businesses we own can handle them effectively. Company managements run their businesses irrespective of the interest rates, inflation, etc. We try to choose busi-nesses that have the ability to withstand such short term macro changes.
MF Live: When advisors are looking at the PPFAS LTVF, how should they consider the positioning of this fund in the asset allocation play that they do for their clients?
Mr. Rajeev Thakkar: What happens is when one buys only Indian stocks; they look at the equity position only in India. India has 6-7% of the global GDP in purchasing power parity terms. So 93% of the global GDP is outside India's border.
When we take a portion of our investment overseas, what it does is, it reduces portfolio vol-atility dramatically, so demonetization for example has a big impact on India but it doesn't affect global companies. Also different countries do well at different points in time. With this additional diversification, the portfolio volatility comes down and even in the lean phase you can generate some returns from equity positions in different countries.
PPFAS LTVF in itself is an asset allocation where diversification is not only across sectors but also across geographies.
The original article could be seen here.