You follow the strategy of having a few funds. Other AMCs with similar assets under management (AUMs) have many more schemes. Why?
The first thing is to not confuse the end investor. Before we were a mutual fund, we were a PMS (portfolio management service) and we also distributed third-party products. At that time, even as professionals, it was difficult to sift through the thousands of schemes in investors’ portfolios and spot the differences. The second is that within Parag Parikh Long Term Equity Fund, we can invest across market caps, sectors and geographies. Think of it as a Swiss army knife—it’s a single device but has a lot of functions.
As a fund house we will only launch funds in categories where we are excited to invest our own money or where we have some form of differentiation. Some categories of funds should not really be mass products. For example, I see merit in the argument of hiking the minimum investment amount in credit risk funds. We are not big fans of thematic funds either.
Also, each time you move from one fund to another, there are costs. The magic of compounding is broken. Five broad categories—diversified equity, liquid, debt and for those who want it, a REIT (real estate investment trust) and a gold ETF (exchange-traded fund)—meet most needs. Currently, the market has 250-300 mutual fund schemes to invest in 500 stocks.
You have relatively high cash levels. Why?
Cash is the residual position. We start out by spotting attractive opportunities. If we like something, we go out and buy it. If we want to exit based on fundamentals, we do so. What is left over is cash. For some time, auto has been witnessing sluggish demand and stock prices came off significantly. So we added Hero Motocorp and added to our existing position in Suzuki which again reduced cash.
Are you positive on the auto sector?
When things were good, people were expecting that they will always remain good. They were pointing at auto penetration being so low and arguing that it’s not a cyclical business. Our approach was that it is a cyclical business. Valuations have now become more appealing. On the other hand, FMCG stocks are overvalued. Non-banking finance companies could see issues operationally. These are two places where we are advising caution. Small- and mid-caps have sold off and a lot of the excesses have gone away.
You use arbitrage to reduce unhedged exposure. Is your high turnover ratio, at 224%, due to arbitrage positions?
We need to maintain 65% gross exposure to Indian equity. Since our unhedged exposure is around 52%, the balance 13% has to be deployed in arbitrage. This is again a residual thing.
Excluding arbitrage, the turnover ratio is just 5%. We tend to hold a stock for at least five years.
You invest about 25% of your portfolio internationally. What is your view on the US market?
Increasingly we are at a stage, where FAANG (Facebook, Amazon, Apple, Netflix, Alphabet/Google) is not tech. Alphabet and Facebook are media and advertising companies. Netflix is a media and entertainment company. Amazon is a retailer and to some extent a tech company. The needs are moving from an older form of delivery to digital form of delivery. For example, I would argue that Paytm is a financial company rather than a tech company.
I would like 100% of my portfolio to be in tech. But that doesn’t mean I intend to invest in companies like Infosys or Wipro. Even HDFC Bank can be considered a tech company as more and more interactions with customers are happening through the app or website.
But what about the valuations of these firms?
That’s a fair point. There are bubbles in this space and pockets of froth. However, I don’t think this is the case with something like an Alphabet or Facebook. Amazon is difficult to say because it ploughs back all the profits from its mature business into areas which are making losses.
How do you compare the Indian market with global counterparts?
Rather than either/or, if you invest in both, it will reduce volatility. A global portfolio will shield against country-specific events like demonetization. In the last 10-15 years, the US market has done better (if you compare returns in the same currency, dollar or rupee), but we don’t know if this will continue. Our approach is stock specific, we are not buying the index.
Any expectations from the Union budget?
The earlier days of excise tax tinkering is gone (we now have GST). Even in income tax, we have moved to the 5-20-30% slab rates. At the maximum, increase in the slab or surcharge comes in. One event people were expecting—capital gains coming in—has already happened. There may also not be much fiscal space to increase the 80C limit.
Where do you see the future growth of PPFAS AMC coming from?
Parag Parikh Long Term Equity Fund has been operational since May 2013. At that time, distributors had more reason to tell us no, than yes. They also wanted to see our track record. The main traction has been coming in the last one and a half years. Distribution sign-up si on the rise. We have been reaching out to independent financial advisers (IFAs). Earlier, we had one central office in Mumbai. Over the last five months, we’ve started offices in Delhi and Bengaluru. There is a lot of growth in Parag Parikh Long Term Equity Fund left as well.
How much of the growth is coming from online?
Currently, we have 60-65% of our AUM in direct and 30-35% in regular plans. We get roughly half our inflows from IFAs and half from online platforms. This year we’ve seen some interest from larger distributors too. Since we have completed five years, there’s some traction coming in.