Since inception, PPFAS Mutual Fund has been looked up to in the mutual-fund industry for its no-nonsense approach and skin-in-the-game model, which were the hallmarks of its founder, Parag Parikh. So, how has the fund fared after the veteran investor passed away in May this year? We talked to Rajeev Thakkar, CIO of the fund, to find out.
Can you brief us on how the fund coped with the loss of its founder, Mr Parag Parikh, whom so many investors looked upon as a role model?
It is an event that has shaken all of us, but in terms of operations we haven't faced a big disruption. I have been the chief investment officer of PPFAS Mutual Fund since the inception of the fund and my team has remained since inception too.
The role that Parag bhai was playing was that he was the designated CEO of the asset-management company. So, he was mentoring us on the broad investment philosophy, value systems and all that, apart from interfacing with the AMFI and the SEBI, and he had some client-facing roles too. So, post his passing away, Neil (his son) is now the CEO, and luckily for us he's been with PPFAS since 2004. Geeta bhabhi, his wife, is also recovering and she has been supportive. So, the loss has been more on a personal front more than on an organisational front.
In any case, Parag bhai was not handling day-to-day affairs at the fund. He was a person who believed in calling it quits at work, at 5:30 or 6, and then either taking his guitar or singing lessons or meeting people or playing golf over the weekend. He was a strong believer in work-life balance and his belief was that there should be systems in place so that everything runs properly and doesn't depend on any individual. That has really held us in good stead.
Have you faced redemption pressure on the fund?
No, when the incident happened, our assets were about ₹585 crore. My initial thought was that we could see redemptions of about 10-15 per cent. A lot of clients have been with us since 1996; we thought that the newer clients might be worried a bit. But actually, nothing happened. There was no impact on the assets whatsoever. Today we are at about ₹635 crore. So, clients have stood by us despite the difficult circumstances. Our team took efforts to reach out to all clients. We not only sent out emails or written communications, we also went and met many clients face to face. So, I think that helped. In fact, we have seen positive net flows on a continuous basis since that day.
Your fund is labelled a value fund. But many stocks we see in the portfolio, like private banks, trade at pretty high valuations. What is your comment on that?
Actually, there are two schools in value investing. One is the Graham approach-buy high-dividend-yield stocks or cash bargains, low P/E stocks and things like that. That's the pure value style. The other is a Buffett and Munger kind of approach where you buy quality stocks at reasonable prices. That's what we follow. We call it five-star meals at Udipi prices.
While some value funds have struggled at single-digit returns for the last one year, your fund has managed better returns at 14-15 per cent. What explains this?
What is helping us is international diversification, which is giving some consistency to the whole return profile. For example, our international component is not affected by what happens to Bihar results or a Fed rate hike. At the same time, some bottom-up picks have done well. There have been some individual stocks with reasonable weights which have done well in the last one year - ICRA, Maharashtra Scooters. So that has resulted in the 14.5-15 per cent kind of return. Also, we get a currency yield on the overseas portfolio and the dividend yield on our overseas stocks, which is more fixed-income-like. This also helps.
In banking, how do you justify paying four times book value or more to own private-sector banks? Aren't stocks trading below book value, like PSU banks, a better bet?
Again, I'll quote Buffett. He said that in only one sector, which is banking, don't go for the cheapest stock. In fact, he has even quoted a number. He says that he doesn't even mind paying four times the book value but he wants the best-quality bank in his portfolio. Banking is a business where the leverage taken on is ten times or more. Therefore, even the smallest mistake on any parameter can really wipe you out. The price to book value that we are seeing in the case of public-sector banks raises the question: do we really know the true book value of these banks? Does the book show the true picture on stressed assets?
So in the banking space, discipline, credit processes and all those are very important. If you look at his own approach to investments in the banking space, Buffett is buying the best-quality banks, even if the multiple is high. You're playing with leverage and leverage in the wrong hands can be devastating.
So what about consumer stocks or other defensive stocks? They offer the 'moats' that Buffett talks about but are so expensive.
Yes, that's why, in our traditional hunting ground, we are not there at all. We don't own, for example, a Page Industries in our portfolio, or a 3M India or Nestle India. We are finding better value in their parent companies than in the Indian arm. So, we have 3M Incorporated; we have Nestle, the Swiss company. Here there are two advantages. We are getting the valuation arbitrage. The parent company Nestle gets about 40 per cent of its turnover from emerging markets, which are high-growth areas. Plus more value gets captured at the parent level because of the royalty payments from the subsidiaries. So, we are sticking to this strategy in the current environment, where the Indian consumption space is really very expensive. We are avoiding most of it. Probably the only FMCG kind of name we own in India is Zydus Wellness.
Many industrial and cyclical stocks are trading at rock-bottom valuations. Would you buy them? And what's your take on overall earnings growth being so slow?
We are not playing a thematic game; we have a bottom-up approach to individual stocks. Within that, we have never been fans of low-quality businesses. So, if a sector is generating return on capital of say 6 per cent across a cycle, then it's better not to own it. So, we are not playing the recovery game in that sense. But credible companies which are going through temporary tough times, sure, we would like to look at them.
We are for the moment in a low-growth environment. So, even if nominal returns for the market were to reduce from 15-20 per cent that equity was giving to 10-12 per cent, that's not such a bad thing overall.
As you track the global technology sector pretty closely, what's your take on e-commerce valuations and all the money that's going into tech startups in India?
There was a very interesting framework given by a professor in a Singapore University recently. He said that wherever the fulfilment of a customer's need can be done online, that is where it makes sense to have an e-commerce business. So, think about music downloads, iTunes stores or streaming movies via Netflix, Google playstore. Using e-commerce for ticketing makes sense too. E-commerce is also efficient wherever the number of stock-keeping units is very large, the search cost is very large and where a physical store will be inefficient. On the other hand, you have some products where delivery has to be in the physical world. Sometimes you may need the product immediately or the product may be low value. Here e-commerce would most likely fail. Think of medicines. If you want to have a tablet, you can't order it online and wait for it to come. Ditto for bread, groceries, milk and so on. So, some of these models may not succeed. But some will succeed in a big way.
Have you participated in recent IPOs like InterGlobe Aviation or Coffee Day? Why?
We haven't participated in these IPOs. Typically, when we evaluate management quality, a big weightage is given to the management's past behaviour. In an IPO, if it's the first company from that business group, it won't have an operating history. Some businesses may be run efficiently, but the actions may not be friendly towards minority shareholders. So typically, we would want to see some behaviour as a listed entity before we invest in a company. Again, typically, near about the IPO, investment bankers would tend to hype up the sector, the prospects and so on. So, we traditionally have been staying away from IPOs unless an IPO is something very compelling.
Alphabet (Google) is your biggest holding and it has gone through a restructuring. What is your take on it?
The restructuring is actually very significant. The coming quarter will be the first quarter where Google's reporting will be under the new structure. Currently, it is generating $14 billion profit after tax. Let's say that profit is coming after spending $9 billion on R&D. So, what is happening is that people are just valuing it on PAT; there's no value being ascribed to the R&D.
This is a company that's making many 10-15-year bets. Some of the projects are very significant. They have the Next business, which is hardware run by Tony Fedel, who is the creator of the iPod and the iPhone. Then there is their life sciences business. Big initiatives in artificial intelligence, in robotics, renewable energy in terms of wind energy are on the cards too. They're actually working on ultra-efficient wind mills that operate like kites on steel wires. Then they have this venture-capital fund called Google Ventures, where they buy stakes in various interesting startups. So, when the break-up happens, it will force people to use sum of the parts for the entire business, rather than just value it on the earnings that are being shown to them in a consolidated manner.
This interview appeared in the January 2016 Issue of Mutual Fund Insight.