Why is PPFAS's flexi-cap fund sitting on 20 per cent cash? Raunak Onkar explains.

In the past month, the Indian equity market has fallen by nearly 6 per cent, with the mid- and small-cap indices seeing sharper declines of around 9 per cent. Despite the dip and stock prices coming down from their recent highs, Raunak Onkar of PPFAS Mutual Fund said that companies are still not "reasonably priced" enough to warrant building new positions in the portfolio. He also stated that they would "rather wait and find the right valuation than deploy our entire portfolio", which may explain why the AMC's flexi-cap fund, India's largest active equity fund with assets worth over Rs 87,000 crore, is sitting on cash holdings of nearly 20 per cent.

Presently the Fund Manager and Head of Research at PPFAS Mutual Fund, Onkar co-manages five funds, of which the Parag Parikh ELSS Tax Saver Fund and the Parag Parikh Flexi Cap Fund are rated five stars by Value Research.

In this interview, Onkar delves into whether the ongoing market correction is expected to continue, which sectors look attractive and if any compelling opportunities exist for the flexi-cap fund to deploy cash.

Markets are in a phase of consolidation right now. Do you think the current scenario is expected to continue? What can be triggers for potential recovery?

I don't know whether the market is really consolidating because the markets have always been uncertain. Since we all read the same media -companies, financial statements, transcripts and annual reports - we should not assume we have some predictability. So it's not like everybody else will have a materially different insight as to what will change. The most important consideration for any company we examine is whether it can withstand a global shock.

For instance, consider the period of the Covid-19 pandemic, during which the severity of the crisis remained unknown. We had a lockdown in March 2020, and the markets crashed. The most important thing was whether a company would survive or not. It had nothing to do with the growth expectations of that sector or business. What matters most is the company's ability to survive and whether it possesses sufficient cash reserves. The company's ability to absorb shocks, such as experiencing a period of low earnings for a few quarters, is crucial. When we looked at companies with strong balance sheets and cash flows, they already had this shock absorption capacity. Companies that did not borrow too much money or were not overleveraged benefited because they did not have to meet their interest rate commitments during that period of time.

We will never know in advance what can hit us. Therefore, it's always preferable to have a margin of safety in the companies you consider, and the companies themselves should have some capacity to absorb shocks. This way, the peaks will take care of themselves, but the downturns will be much less severe.

During this correction, which sectors or companies have started looking attractive? Are there any that still seem overvalued?

The majority of the businesses in the country exhibit overvaluation. Therefore, retail stocks of consumer brands, which consistently generate cash flows, appear to be overvalued. Valuations are still too low compared to global peers in similar business categories. In India, at least, we don't feel as comfortable purchasing new businesses in this area.

Interestingly, global markets are doing very well in terms of cash generation and profit generation. Global tech businesses are now reasonably valued. Many companies in the innovative pharma space are intriguing globally. So, I think global markets do have some kind of a valuation edge at this point. But in India, I think it's better to stay cautious rather than just chase that illusory growth that everybody is looking for, which will come over a period of time.

We have observed this phenomenon over the past several decades following the country's liberalisation. But that does not mean that you have to keep paying for 20 years of growth today. One can gradually grow, see cycles over a period of time and then participate when the valuations are right. I think we are in that camp where we would rather wait and find the right valuation than deploy our entire portfolio.

PPFAS has a reputation for deep research. How does that focus influence your portfolio construction? As a fund manager, how much autonomy do you have in making decisions?

Despite the several fund managers overseeing the schemes, they each hold distinct roles. I am assigned the overseas part, while other fund managers look at debt and equity allocation. Rajeev Thakkar, the CIO, oversees the entire investment team. And we have clear autonomy.

At PPFAS, research is a core part of the process. We focus on understanding a business and its promoter's mindset - they should be able to navigate across cycles. We seek answers to questions like where a business should be valued and whether we can price it based on past and future trends without accounting for too many predictions. All this necessitates extensive research.

Our research team is structured such that each analyst focuses on a specific sector. Once they build expertise, they become sector experts and then pitch ideas to the investment team. We internally debate how a business works, and they keep generating insights and pitching the idea. Meanwhile, in the back of our minds, we develop a valuation framework as to the right price to pay for a business and whether it's the right time to buy. That really guides us in building the confidence to buy a particular stock in the portfolio and hold it for a long period of time.

How would you describe your personal investment philosophy? Has it evolved over the years, especially as markets have changed?

I don't have a personal portfolio, as my entire net worth is invested in either PPFAS mutual fund schemes or the shares we got through our ESOPs. I'm very attuned to the same thinking style as Rajeev Thakkar regarding managing funds. Personally, I have not shifted my investment mindset as much, and the principles have to remain the same. However, when discussing the overall investment framework, the most crucial aspect is approaching business investments with a long-term perspective.

These are three areas to focus on: the quality of the business, the quality of the people running it and the price you pay for it. Understanding a business is important as one has to visualise how the business will evolve over time. Secondly, do you trust the people who are running the company? Or we need competent and trustworthy people who will not mismanage your money. The last point is the price you pay for the business, and this is tricky because pricing any stock or company is actually an opinion. Thus, there will be companies where you may miss growth, and that surprises you. There may be companies where you price growth correctly and buy the stock at the right price, and the stock performs as expected, which is great.

Sometimes, you may also overestimate the growth, and you overpay for that price today, and your outcome will not be as favourable in the future. Once you know this range of outcomes for any business, whether it's a favourable time to start buying or selling is also important.

Both the PPFAS Flexi Cap and ELSS funds hold cash when valuations seem stretched. With the recent market corrections, do you see compelling opportunities to deploy this cash? If so, which areas look most attractive?

There are not many compelling opportunities. Although the market crashes have happened and some stocks have indeed fallen, they were also built up quite severely just before the crash. So, although they have come off from their peaks, they are still not very reasonably priced to build a new position in the portfolio.

We are finding opportunities in areas where we already have some exposure, such as private sector banks, our most attractive investments. We have been adding to those stocks based on whatever inflows we are getting. But broadly, the cash position in the fund still remains high - close to 20 per cent.

Also read: Look at large caps, hybrids and multi-asset funds in current market: Nippon India MF CIO