It does not launch new schemes to take advantage of the bull run and wants to be transparent and accountable to its unit holders

Challenging the status quo of the mutual fund industry, PPFAS Mutual Fund, promoted by Parag Parikh Financial Advisory Services, held its first unit holders meet in Mumbai on 22 November 2014. PPFAS MF previously held the Annual General Meeting (AGM) of its unit holders in Chennai and Bangalore. This was as another first by the fund house in the mutual fund industry. In Mumbai, PPFAS Asset Management chairman and CEO Parag Parikh and chief investment officer and fund manager Rajeev Thakkar presented their investment philosophy to the unit holders, after which, in an elaborate question and answer session, they replied to queries from their unit holders and distributors on the rationale behind selecting various stocks for the portfolio.

PPFAS Long Term Value Fund and the scheme has gathered a corpus of Rs500 crore, with around 2,900 unit holders, which is higher than almost 60% of the equity diversified mutual fund schemes in existence.

Enthused by the assets flowing in, most fund houses would have launched additional schemes to attract investors and increase their asset base. However, you will not see anymore schemes launched by the fund house as PPFAS Asset Management chief Parag Parikh, intends to have only one scheme, “so as not to confuse the investors,” he says.

In addition, this is one fund house, which has ‘skin in the game’. “I, my sponsor company, the AMC, the fund manager, the directors and most of our employees have invested in the scheme. Out of the total corpus of Rs512 crore, around 8% i.e. around Rs42 crore is from all of us,” says Parikh. “The only way to instil a sense of accountability is to ensure that the fund management team is investing their own monies along with those of the clients’,” he points out.

Thakkar elaborated on the investment strategy of the scheme. He said that governance is their topmost priority. They look at the promoter and management quality—those who are competent and passionate about their work. They look for high return on capital, low capital cost and low debt. Finally, they look to buy such businesses at a reasonable valuation.

Almost all the questions during the discussion revolved around why certain investments were present in the portfolio. Most investment managers would have dreaded such a situation when they are answerable to investors for investments, especially those investments that may have not worked out according to plan.

When asked about why certain investments had less than 1% weightage in the portfolio, as such investments would not make a significant impact to overall returns, Thakkar responded that it was not as they had intended. For example, MT Educare which has a weightage of 0.72% in the portfolio, was intended to be higher, but as they started to buy the stock, the price shot up by nearly 25%, hence, the attractiveness of the investment was lost and it remained at the tail end of the portfolio.

The scheme can invest up to 35% of its corpus in foreign investments. PPFAS Long Term Value has 25% of its assets invested in foreign stocks. When asked the rationale behind investing a high percentage in foreign stocks when there is a greater opportunity of picking high yielding stocks in India, Thakkar replied that the overseas stocks picked have an Indian arm as well, so in turn, they do get the benefit of the Indian businesses too. They have hedged the currency part of the portfolio to reduce currency risk.

With interest rates expected to decline, bond investments are expected to do well, at the same time the equity market is getting overvalued. One participant asked, why the scheme does not have a greater exposure to debt instruments, as over 90% of the portfolio is invested in equity. In reply to this, Thakkar mentioned that if he invests in bonds with a yield of say 9% now, he would have to time his exit when yields fall to make a higher return. If not, if he holds the bond until maturity, he will earn a return of 9%. Looking for short-term profits is not in line with the investment philosophy of the scheme, he said.

Equities are their area of expertise. If they see a long-term opportunity, they will continue to invest in equities. The moment such opportunities no longer exist; they can reduce the equity exposure to 65% of the portfolio. By investing in arbitrage opportunities, the long equity exposure can reduce further to 50% of the portfolio, Parikh said.

Towards the end of the discussion, Parikh explained why PPFAS Long Term Value does not have a dividend schemes. “Dividends are unethical. They give you the impression that you are getting something extra from the fund. However, you are not. The dividend is just your returns being given back to you,” he explained. There is also a behavioural angle to this. “When you get a dividend payout,” he explained, “you are likely to spend the entire amount on something unnecessary. However, if you had to redeem from the scheme before spending, you will think twice before redeeming, and will spend diligently.”

PPFAS may have instilled some amount of trust by providing accountability to their investors. In our analysis of portfolio management schemes, their PMS was among the best. Unfortunately, their mutual fund scheme, PPFAS Long Term Value, has not been among the best in comparison with other schemes. Many stocks are not the best in their class and hence are valued available cheap. Returns from them are unlikely to be high, especially since these stocks have not been able to prove themselves over multiple business and market cycles. However, this scheme is designed for the long-term and it would be too early to comment on the performance. In fact, Mr Thakkar mentions that they are not looking to be among the best, their only aim is to provide investors a decent return over the long-term.