When I met Rajeev Thakkar for the first time about three years ago, I was struck by how different the nerdy chief investment officer was from his flamboyant boss and mentor, Parag Parikh. Even before I was able to finish many of my questions, Parag Parikh would shoot one of his famous one-liners. "Don't ask me what I think of a stock. Ask Bejan Daruwala. I cannot talk about more than the 25 stocks I own."
The quiet Rajeev would bestow a nice smile at his mentor's one-liners. But when it was his turn to answer questions, he would take his time. He relied more on method and math than opinions.
Over our many meetings since then, I have come to respect Rajeev Thakkar's well-reasoned views on stocks, sectors and the market. So when PPFAS Mutual Fund held its AGM in Chennai this year, I jumped at the chance of meeting Rajeev and Neil (Parikh) for a breakfast meeting.
Rajeev was early to the meeting and so was I. We decided to fill our plates (me with all kinds of unhealthy eats - hash browns, pooris and a jalebi, and Rajeev with apple slices and one lone uthappam) as we got chatting.
I ask him about his career first. How did he get into equities?
"I have been an equity person since I was ten-12 years old" is his surprising answer, dashing my image of him as the college kid who loved physics or maths but was forced into the market. "My father used to buy shares and we got all these annual reports at home. So even when I was studying, the mandate from my family was that first I should get a college education and then get into the market. By profession, I am a CA. I graduated in 1992 and did auditing/taxation till 1994. From 1994, I have been in financial markets."
Rajeev seems to have worked with all the big names in the market. He was with Prime Securities for five years, then with the broker Bimal Gandhi. He handled Parag Parikh's PMS (portfolio management service) from 2003 to 2013. When Parag Parikh decided to shutter the PMS business and start an AMC, Rajeev was the obvious choice for portfolio manager.
Was the change tough? On the contrary it made things easier, recalls Rajeev. "When we transitioned from the PMS, we had 650 clients. That's 650 different portfolios to run. Now there's just one portfolio to run. It's easier for the client, too. If he had put `25 lakh into a PMS, his annual statement would consist of some dividends, some interest income, some capital gains and so on. And the client has to figure out how to file his returns and pay taxes. But in a mutual fund, the statement is much simpler. One thing that is really different from a client's point of view is that when he buys units in a fund, he is fully invested. In PMS, we could deploy money in phases."
So, as the Sensex approaches a new high and investors pour money into equity funds, will the markets crack like 2008? Is it better to take some money off the table?
Precise as he is, Rajeev challenges that statement first. "Corporate earnings every year are at a new high. A decade from now, the index will be at a new high. So it is valuations I would look at. Highs don't matter." On valuations, Rajeev agrees, markets are trading above long-term averages because of the weird world we live in. "The economic theory I learnt about at college never talked of negative interest rates. It always taught me about the liquidity-preference theory - people need to be paid to postpone consumption. But today $13 trillion of securities globally offer negative yield. Given this ultra-low opportunity cost to money, it is not surprising that valuations for stocks should be high."
But Rajeev warns that a high entry point will affect future returns for investors. "Both as AMCs and media, we have a duty to lower future return expectations of investors. Earlier we earned 18-20 per cent on equities when inflation was running at 8 per cent and we had a nominal growth of 15 per cent. Today, in a low-growth, low-inflation scenario, 12 per cent would be a great return. People should be prepared for that."
Given that his fund parks a third in overseas stock, do US markets look cheaper? Rajeev thinks so. "A stock like Apple Inc, net of cash is available at just ten times earnings. Alphabet Inc would be about 25 times earnings and this is a firm that is still growing at 20 per cent in dollar terms. 3M, Nestle are all cheaper than their Indian arms."
Pre-empting my next salvo, he adds, "People usually make the argument that India is a growth market. But this does not hold good for all companies listed here. For a Reliance or an ONGC, which are commodity plays, or Tata Motors, which has a global footprint, it is global demand trends that matter."
I finish eating up my jalebi and am in a mood to play the devil's advocate. If 12 per cent is all you can expect from equities, why should any Indian invest in them? After all, we can get 8 per cent risk-free returns from the PPF or bank deposits.
Rajeev chews this along with his uthappam and responds, "The number of fixed-income investments that offer 8 per cent interest is pretty limited today. Bank-deposit rates are already at 7 per cent and even PPF rates are floating. Given that government-bond yields are already at sub-7 per cent, current rates may not be sustainable. Look at 15- or 20-year tax-free bonds today. They give you only 6.3-6.5 per cent. With inflation at 5 per cent, that's a 1 per cent real return. Therefore, equity returns at 12 per cent are nothing to be scoffed at," he retorts.
So what happens when, one day, interest rates decide to behave in a textbook fashion and become positive? Won't investors get hurt then? Rajeev thinks that this won't happen suddenly. "Economic stimulus and ultra-low interest rates were supposed to be unsustainable for the Japanese economy a good five, ten and 20 years ago. But they have stayed. Quantitative easing programmes started in 2008 and 2009. Economists warned that we would see consequences of that within a year or two. But it has been eight years. I am not making predictions here and saying high valuations will always prevail or that liquidity will keep flooding in," he qualifies.
Usually, it is external trigger points that cause FIIs to rush out of India. This time, will that trigger be the US Fed rate hike? Rajeev disagrees. "The question is if we will be moving to a world where money will suddenly become very expensive. The answer is no. Today, we are talking of Fed rates moving up from 0.25 per cent to 0.5 or 0.75 per cent. No one expects Fed rates to be at 4 per cent."
"Put yourself in the shoes of a pension-fund manager, corporate CFO or sovereign wealth fund," he tells me. "You have this huge pile of money to deploy for ten or 20 years. Where do you put it? If you can borrow at such low rates, equities still make sense. Even companies realise this. In any other kind of market, the Bayer-Monsanto acquisition would be seen as expensive. But the opportunity cost for Bayer today is close to zero. It can borrow at near-zero rates and buy a growing company. So the acquisition is immediately EPS-accretive. Similarly, share buybacks by firms such as Apple are also driven by the same logic."
But I am in a particularly stubborn mood that day. So I persist with the comment that in India, record flows into equity funds, a rush for IPOs, high valuations for mid caps - these have always been signs of a bubble. Rajeev is too honest to evade that one and says, "I agree with you 100 per cent. The way IPOs are being priced today leaves very little long-term value on the table. There are some segments of the market that are frothy, where money will be lost. The situation calls for extreme caution."
Overpaying for moats
I turn to that buzzword that every newbie investor is mouthing today: 'moat.' As a big fan of Buffett-Munger, does it worry Rajeev that everyone is chasing companies with moats? Doesn't that make these stocks richly valued?
Rajeev gives an intellectual answer to that one. "As investors, we know all about compound interest. It helps your investment grow and generates exponential returns over time. A similar argument exists for the technological advances of mankind. Human beings for the first 15,000 years did nothing except rub two stones and light a fire. But within our lifespans, we have seen how much mankind has advanced. Things are changing at a faster and faster pace. So my own theory is that, when things change so rapidly, the durability of moats for businesses will also get shorter and shorter. So yes, I believe in looking for moats. But rather than believe that the moat will continue for 25 years, I will have to factor in the moat lasting only for, say, five years, with uncertainty thereafter."
He goes on to cite three examples. BHEL is a low-cost, efficiently-run power-equipment manufacturer. India has significant power needs, so it looks like a moat company. But if you see the backlash against coal-fired power and rapidly falling solar tariffs, he wonders if there can be any moat for BHEL or even thermal power utilities.
Today, a lot of leading automakers are great at internal-combustion-engine technology. But if electric vehicles were to take over in ten years, we may not have visibility over ten years for these companies. Finally, distribution was supposed to be a great moat for FMCG companies. But today a new firm can simply sign up with Amazon and dump all its logistics onto it.
Rajeev concludes two things. Valuations of moat companies have gone very high. As the pace of change has accelerated, you must not overpay for a moat.
So being such an equity junkie from his early years, where does he put his personal money? "Equities are the bulk of my investment. About `7 crore of my family money is in Parag Parikh Long Term Value Fund. Apart from this, I own a primary residence. My wife works in a bank, so she had access to a very low-interest-rate mortgage loan. So she bought a flat and we have let it out."
Most of Rajeev's monthly savings go, via SIPs, into the Long Term Value Fund. "In addition I have opted for the company-sponsored NPS, so a part of my pay cheque flows there. That helps me get that additional tax break."
But does he not get tempted to dabble in stocks? "I am surprised when people working in the mutual fund industry say they invest in direct equity. Working in a fund, it is so difficult to buy or sell a single share. You have to ensure that no trade happens in the fund. Compliance is tough. With our busy schedules, where is the time to track the positions we own?"
He adds with emphasis, "Since we launched this fund neither I nor my family have made a single purchase transaction for an equity share. The only transactions we have made are sells on the legacy portfolio."
As he tracks US stocks closely, has he bought US-listed shares directly? It's not efficient to do so, says Rajeev. "For one, capital gains are not tax-free on overseas stock, even if you hold the stock for the long term. Two, when you convert your currency, the bank charges heavy transaction charges both ways. As a fund, you get very good inter-bank rates. Three, if you own US equities and there's a death, there's a heavy 40-45 per cent estate tax on your entire portfolio value before the shares can be passed on to your heirs. When you apply through an Indian fund these issues aren't present. Actually, I did open a brokerage account to buy stocks overseas, before we launched the fund. But I realised the hassle of it and haven't made a single transaction in that account."
So how does Rajeev keep so calm? I can't help asking this question, because I've met him under some pretty stressful circumstances. I remember, but don't mention, a meeting last year, a few months after the fateful accident at Omaha, when Rajeev looked grief-stricken but in control of his emotions.
Neil Parikh chips in at this point and agrees with me that it takes a lot to anger or rattle Rajeev. "Parag bhai and others like Manish Chokhani always prodded me to go to a Vipassana meditation course. But I haven't got around to doing it yet," says Rajeev with a smile.
So how does he fill in his leisure time? "I have three time-wasters. One is reading fiction - not investment or management books but pure crime fiction. I like reading Robert Ludlum and the like. I play chess and watch movies or television series," Rajeev says.
What! Saas-bahu serials? "I am not a fan of emotional dramas," laughs Rajeev. "I am more the Jason Bourne, Bond and Mission Impossible kind of guy." He admits to being a Homeland addict. Neil and I agree Quantico is too filmy and I strongly recommend Shark Tank to Rajeev.
Does being a buy-and-hold investor also make him calm, I ask him cheekily? After all, portfolio turnover is pretty low at the Parag Parikh Long Term Value Fund. He grins and says, "People often mistake buy-and-hold for buy-and-go-off-to-sleep. They ask, 'Why should I pay a management fee just for you to hold? I can hold it myself'. But being a portfolio manager is essentially like a lifeguard's duty. He just sits there most of the time. But he needs to be there to intervene when someone's life is in danger. So, buy-and-hold is not just about buying great companies but also being aware of changes and being ready to take decisions if things change. Buffett himself has gone on record saying he should have sold Coca-Cola when the valuations were higher."
Nice point. Having polished off my hearty breakfast and glugged coffee, I wrap up the interview with a satisfied feeling.
Yes, if I needed a lifeguard for my portfolio, I'd any day choose this calm, intellectual and careful guy over a flashy Baywatch-type money manager.