In conversation with Raj Mehta, Fund Manager, PPFAS Mutual Fund
Editor’s note: In the investing world, value vs. growth and concentration vs. diversification are never-ending debates. In reality, these are rarely either-or choices since there’s no all-weather investment strategy.
At present, the fear of rising inflation and Federal Reserve (Fed) concluding its ultra-loose monetary policies sooner rather than later is making investors jittery. But at the same time, exciting investment themes that have emerged during the pandemic have been appealing to them.
To help investors get more clarity on the present market conditions, we recently interacted with Raj Mehta—Fund Manager, Parag Parikh Mutual Fund. In a free-wheeling conversation, he not only shared market insights but also highlighted attractive long-term investment opportunities.
Here are some highlights of our conversation
Monetary tightening to be gradual
Ultra-lose monetary policies of the major global central banks propelled asset prices during the pandemic. This has been the construct of the on-going synchronal rallies in global equity markets. But the present market sentiment has been reflecting a potential reversal of the Federal Reserve’s dovish monetary policy stance. Thus, we began our discussion by asking Raj about the Federal Reserve’s tapering.
According to Raj, the decision of tapering is going be to a difficult one for the Fed. An ultra-dovish stance can’t continue forever and thus will have to be reversed at some point in future. Nonetheless, the process of policy normalization is likely to be gradual. Interest rates might have already hit bottom and don’t have a further room to fall. Raj believed markets won’t be perturbed by tapering, unless the unwinding happens at a rapid pace.
Valuations aren’t in a bubble zone yet
We asked Raj if he has been sensing any bubble formation in equities. He was of the view that at 25X, the valuations of India’s bellwether index, Nifty 50, don’t seem to be in a bubble zone. Divergence in the valuations of different indices suggests that there isn’t any valuation froth at the moment. Rather, he found them reasonable for Parag Parikh Mutual Fund’s universe of companies.
Only a few primary market issuances look attractive
To answer our question on primary market buoyancy, he underscored Parag Parikh Mutual Fund’s selective approach to IPOs. One should look at companies over the cycle, he felt. According to him, quite a few newly listed companies have been making losses, and many of them don’t have any path to profit.
Interestingly, the largest fund of the fund house, Parakh Parikh Flexi Cap Fund has invested in 4 IPOs only, since its inception in 2013.
Think Global and Invest Local is an attractive investment theme
According to Raj, Think Global Invest Local is one of the most attractive investment themes for long term investors. India represents only 5% of the world’s market cap; yet the influence of global companies on the Indian economy is strikingly high. Thus, Indian investors should not restrict themselves only to domestic companies and should look at global investment opportunities more strategically.
A blended portfolio of global and domestic companies can offer effective diversification and better returns, believed Raj.
Elaborating more on this topic, Raj cited examples of the underperformance of Indian markets in the past. India-specific factors such as demonetisation and GST implementation amongst others had dragged Indian markets (while global markets remained unaffected). Similarly, during the initial phase of the pandemic, developed markets recovered quickly from the March 2020 lows. However, Indian markets outpaced their global counterparts in the second half of 2020, and so on.
Parag Parikh Flexi Cap Fund—walks the talk
Parag Parikh Flexi Cap Fund has adopted a Think Global, Invest Local strategy to its core. It focuses more on absolute returns rather than relative returns. In other words, the fund endevours to generate superior positive returns and the objective of relative outperformance (vis-à-vis benchmark) is secondary.
Parag Parikh Flexi Cap Fund has generated 20.3% CAGR returns over the last 5 years. And it has multiplied investors’ wealth 4.5 times since its inception in May 2013.
Portfolio traits of Parag Parikh Flexi Cap Fund
Parag Parikh Flexi Cap Fund invests in 20-25 high-conviction stocks following the bottom up stock picking approach.
For portfolio construction and monitoring, Parag Parikh Flexi Cap Fund:
- Prefers companies having impeccable records of corporate governance
- Chooses quality at a reasonable price
- Prefers companies earning high returns on capital over a cycle
- Discourages the entry of high-leveraged companies
- Doesn’t like capital intensive businesses
- Prefers to take cash calls if there aren’t adequate opportunities available in equities
- Keeps the portfolio churning low
Investment penchants of Parag Parikh Flexi Cap Fund
Besides the new-age tech giants touching our daily life, the fund has invested in domestic companies deriving a significant part of their revenue from exports. The fund hasn’t shied away from taking concentrated contrarian bets as well.
Considering the high exposure of the fund to global tech companies, we asked Raj how serious the threat of anti-trust regulations has been. He admitted that anti-trust probes remain the key risk for global tech giants. However, he didn’t foresee such risks materializing for any of the major companies in a big way, considering their case settlement record so far.
Corporate governance is an important stock selection criterion
A complete absence of state-owned enterprises in the Parag Parikh Flexi Cap Fund’s portfolio might raise a few eyebrows, especially given the sensitivity of the fund house to valuations. According to Raj, zero exposure to PSUs is a result of corporate governance parameters set by the fund house. This reiterates the fund’s disciplined approach.
Dwelling deeper on the point of corporate governance, Raj explained to us how capital allocation strategy of a company plays a crucial role in stock selection.
He cited an example of a consumer-facing conglomerate company in the fund’s top-10 holdings. The management of the said company has guided to distribute 85% of earned profits as dividends and decided not to allocate funds to capital intensive businesses. This was a positive change in the corporate governance which prompted Parag Parikh Flexi Cap Fund to invest in the company.
Low exposure to banking is a measured call
We drew Raj’s attention to the low weight of banking stocks in the fund’s portfolio vis-à-vis that in the diversified equity indices. He had a two-point response to this.
Limited exposure to banks stems from worries over the potential rise in Non-Performing Assets (NPAs) due to COVID related stress and the fund’s aversion to PSU banks. Over the long term, private sector lenders are expected to eat into the market share of PSU banks.
Raj quickly pointed out that the fund has been betting big on non-lending financial companies—the ones operating in the capital market infrastructure space. This move has turned out highly rewarding.
As on July 31, 2021, Parag Parikh Flexi Cap fund had an AUM (Assets Under Management) of Rs 13,187 crore. We asked Raj if the growing AUM creates any hindrance in the stock selection. As we understood from him, a large AUM creates a problem only for the mid and small cap universe of stocks.
Thus the fund is likely to carry a long-tail portfolio in future. As a result, mid and small cap companies will have a less concentrated exposure and from 20-25, the fund’s desired holdings will be slightly higher—in the range of 25-30 going forward.
To sum up
- Markets aren’t in a bubble zone
- The Fed’s tapering isn’t a big risk since the pace of unwinding is likely to be gradual
- Think Global, Invest Local is an attractive investment theme for Indian investors
You see, Parag Parikh Flexi Cap Fund plays various overarching themes through just one scheme, making it one of the most comprehensive yet rewarding offerings.
Important note (Please read as a disclaimer): None of the mutual fund schemes discussed in this article is a recommendation to buy, hold or redeem. So is the case with stocks and sectors that might have been referred to directly or indirectly. Views expressed herein overtly or even otherwise are solely that of the guest and inferences drawn thereof are the interpretations of Ventura Securities. The only purpose of this coverage is to create awareness amongst investors.
Investing in mutual funds involves risks. Please consult your financial advisor before taking any decision pertaining to your mutual fund portfolio.
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Disclaimer: The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.