How an obscure PPFAS morphed into India’s Berkshire Hathaway
5 min read 07 May 2023, 11:29 PM IST‘The way of the tortoise’ has seen the fund house grow 200 times its size and deliver a stunning 19% CAGR
PremiumIt started off as just another obscure asset management company (AMC) that dotted the financial landscape of India. Now, it’s morphed into a behemoth—albeit without any bank or corporate parentage. That should tell us why Parag Parikh Financial Advisory Services Ltd, more popular as PPFAS, has been labelled India’s own Berkshire Hathaway, the company founded by global investment guru Warren Buffett.
PPFAS’s spectacular rise is mirrored in the growth of its mutual fund (MF) arm. Its flagship Flexicap Fund is among only 11 equity MF schemes in the country with assets under management of more than ₹30,000 crore. The Parag Parikh Flexicap scheme was launched in 2013 with just ₹150 crore in assets. A decade later, it has grown 200 times its size and delivered a stunning 18.8% CAGR, or compound annual growth rate. This story charts the success of Parag Parikh Mutual Fund and the unorthodox path that it took in India’s crowded MF industry.
The fund was initially founded as a portfolio management service (PMS) in 1996 by the late Parag Parikh, a broker who was also highly respected as a value investor. Parikh converted the PMS into a MF in 2013 after maeket regulator Sebi increased the minimum investment amount for PMSes from ₹5 lakh to ₹25 lakh.
In its more than 17 years of existence as a PMS, Parikh delivered a roughly 18% CAGR to his investors and built up a steady following. The journey, though, was not without its ups and downs. Parikh stayed away from hot technology stocks during the dot com boom and realty/infra stocks in 2007. The PMS also underperformed in highly bullish years, including in 2007, and it led to some disappointed investors opting for an exit.
This was a jolt for Rajeev Thakkar, a chartered accountant who had joined Parikh in the early 2000s and was managing the PMS. Parikh’s backing, however, kept him going. “2007 was the only time that Rajeev offered to quit due to underperformance," recollects Neil Parikh, chief executive officer (CEO) of Parag Parikh Mutual Fund.
AMCs generally offer investors a plethora of schemes, including large-cap funds, mid-cap funds, focused funds and value funds. However, when Parag Parikh launched his new fund house, he took a radically different approach. There would be only one scheme on its menu and it would invest across market segments and international stocks (up to 35% of the corpus). It would also retain the ability to hedge during bull markets using arbitrage (derivatives) positions. Parikh and his team would be open to questions on any stock in the scheme at every annual unitholders’ meetings. There would be no sales targets. The AMC would grow from ‘pull’ and not ‘push’ and all distributors would get the same commission.
“We think of ourselves as professionals, not businessmen," said CEO Parikh, explaining why PPFAS does not have any sales target. “A surgeon cannot set targets for heart bypass surgeries. Doing the right thing for the patient is what matters most."
Parikh’s radical approach, however, did not work in the initial years. The MF industry was driven by distributors and large banks who cared more about commissions. But, PPFAS wasn’t playing ball. Parikh’s single scheme approach meant that he was highly dependent on that single scheme doing well. The victory of the National Democratic Alliance, led by Prime Minister Narendra Modi, sparked a massive market rally post the 2014 elections and the conservative value-driven PPFAS underperformed. Then, in 2015, the AMC suffered a major body blow. Parag Parikh was killed in a car accident while returning from Warren Buffett’s annual investor gathering in Omaha, US.
“We were anxious about a run on the fund and made detailed plans to liquidate assets and create a cash buffer," said Neil Parikh. The panic never materialized. Neil Parikh took over his father’s role as CEO and the other key personnel continued with their jobs. Yet, another bull rally in 2016-17 caught the fund house unawares. This one was led by mid and small-caps, and PPFAS had a small allocation to these segments compared to its peers. “At that point, it seemed like we would never be able to cross ₹700 crore in size," said Parikh.
And, then the tide changed. “When the tide turns, you realize who is swimming naked," goes an old market saying.
A default in IL&FS caused India’s stock market to lose steam in 2018-2019. PPFAS stood out as one of the few exceptions. US tech stocks were also doing well, adding tailwinds to the fund house’s global portfolio. The AMC had also just completed five years of existence, bringing it on the radar of wealth managers and agencies that soon assigned it star ratings.
In 2019, PPFAS Flexicap delivered a 15.3% return, compared to 11% for the category. In 2020, this accelerated to a scorching 33.55% (compared to 16.75% for the category). “We were sitting on 17% cash when the pandemic hit," recounts Neil Parikh. “There was fear all around and it was tempting to wait for the market to go down further. Rajeev, however, would have none of that. He saw it as a once-in-a-lifetime opportunity," Parikh added. In calendar year 2021, the scheme rose by an incredible 47%, beating the flexicap category’s 33.6%.
Thus began its glory days, but PPFAS has had its share of critics as well. Some said its performance comes on the back of a rally in US tech stocks and could be replicated by simply buying Nifty and S&P 500 ETFs in a 65:35 ratio. Without international stocks, it would be just a mediocre performer, they argued. The company responded by launching the Parag Parikh Taxsaver Fund in 2019 that put paid to all this criticism. A purely domestic-focused fund, the scheme has beaten the ELSS, or equity linked savings scheme, category in every single year of its existence.
Another innovation—a debt fund with the ability to invest a small amount in dividend-yield stocks and real estate and infrastructure trusts (REITs/InVITs)—also proved successful. PPFAS Conservative Hybrid Fund has delivered 7.66% since its launch in May 2021, beating the conservative hybrid category as well as most debt funds.
Another concern for the firm has been the declining international allocation (17% at present, down from 30-35% around three years ago) due to the MF industry hitting the limit set by the Reserve Bank of India for overseas allocation. This does take away a key strength of PPFAS AMC but may prove a temporary challenge that can be overcome once India’s forex reserves strengthen and the central bank lifts the limits.
All AMCs mean revert at some point and after three years of increasing outperformance, PPFAS, too, hit a rough patch in 2022. However, the AMC has always advocated a minimum 5-year time horizon and it has already seen a recovery in 2023. “I have underperformed before, and I will underperform again," Rajeev Thakkar, who was now the chief investment officer, told a surprised audience in the 2022 unitholders’ meeting. However, Thakkar added that this should not matter for long-term investors. For those willing to accept the ‘way of the tortoise’, (implying a slow and steady growth) significant wealth creation may yet be in store.
