- What has contributed to PPFAS' success?
- Does the size of the fund matter?
PPFAS Mutual Fund CEO Neil Parag Parikh shares views.
- Does the size of the fund matter?
PPFAS Mutual Fund CEO Neil Parag Parikh shares views.
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TVTranscript
00:00Hello and welcome to the Mutual Fund show on NDTV Profit.
00:13I'm your host, Neeraj Shah.
00:14As always, it aims to bring you actionable insights
00:17from the mutual fund industry, or it
00:19aims to bring you some thought processes into,
00:22or at least thought processes of experts
00:24so that we can imbibe the best thought
00:26processes in our minds to make the best of the mutual fund
00:32investing.
00:33On the show today, we're joined by Neel Parag Parikh,
00:36chairman and CEO of PPFAS AMC, or PPFAS Mutual Fund.
00:42And it's a pleasure to have him simply
00:44because almost every guest and every advisor who
00:48comes in and recommends a FlexiCap fund
00:50has PPFAS FlexiCap fund in their recommendation list.
00:55And Neel, that must make you a proud chairman and CEO,
00:59but also the onus of responsibility
01:02of performing the way you guys have performed
01:06over the last so many years.
01:07Thanks so much for taking the time out
01:09and speaking to us today.
01:10Thank you, Neeraj, for having me.
01:12Yeah, it feels really good.
01:14And it feels like we've come a long way the last 11 years.
01:20And it was not a very easy journey in the beginning.
01:24And obviously, the last few years have been good,
01:26so quite happy with that.
01:28Yeah, as you should.
01:29Neel, before I get to the conversation
01:31that we want to do, I'm throwing this out of the blue at you.
01:34But can I please ask you a question that comes up
01:37nowadays when we talk to experts who recommend?
01:43And then the conversation that comes in as a question
01:45is that PPFAS, for a history of years
01:49now, for a number of years, has performed
01:52on fabulous XIRR returns.
01:56But the question that now comes to a lot of people's mind
01:59is that it was possible for the fund to perform so well
02:05because of, aside of, of course, all the practices
02:07that you guys have, also maybe because the size of the fund
02:11wasn't as large.
02:13And you had a fairly large ability
02:15to invest into global companies.
02:19And now both of those, in some sense,
02:22are slightly different as opposed
02:24to what it was maybe five years ago
02:26because the size of your fund is very large.
02:28And your global exposure, because of the restrictions
02:31that have been put in, cannot be maybe as much as it used to be.
02:34And please correct me if I'm wrong here.
02:35So what would you say to something like this?
02:41Yeah, thanks.
02:41Thanks very much for that question.
02:43So just let me take the foreign investment first,
02:46and then we'll go to the size.
02:48So we've been a PMS.
02:54We had a portfolio management service, or a PMS,
02:56from 1996 to 2012.
02:58And that was an all-India portfolio.
03:02So we've been used to having 100% Indian portfolio also.
03:06The reason we got into international stocks
03:09is not necessarily to get more returns,
03:11but to balance the portfolio and lower
03:14the risk of the portfolio.
03:18For example, you don't want to take country-specific risk.
03:22We want to get some of the country-specific risk out
03:25of here, in the sense that if there's a demonetization
03:28event or a war event in India, at least some of the portfolio
03:32is safe, which is outside the country.
03:35So in that way, it reduces the risk of the portfolio.
03:38Also, at that point, and even today,
03:40we feel that there are some opportunities where
03:43there are no equivalent companies in India.
03:45So if you want to buy a Google or an Amazon or a Microsoft
03:50or a Facebook, there are no equivalent in India.
03:52So you have to look outside the borders for that.
03:55So surely, the international exposure
03:58has come down from 30% to 14%, 14-odd percent,
04:04since the $7 billion market, the cap has been hit.
04:10And we are not allowed to send more money abroad.
04:13But our experience is also to manage 100% Indian equity.
04:19So I don't think that's a really big deal.
04:22The way we look at stocks is the same.
04:24If it's global stocks or Indian stocks, the way we value them,
04:28the way we look at them is the same.
04:31So I don't think that's too much of a thing.
04:33Obviously, we hope the restrictions are lifted.
04:37And we can, again, get back to investing some of that money
04:41into global stocks if valuations are attracted.
04:44So I don't think that's much to do with that.
04:47And on the size of the fund, look,
04:50our size looks big because we manage pretty much one equity
04:54scheme.
04:55I mean, there are two equity schemes, the FlexiCap
04:57and the TaxSaver.
04:58But essentially, the FlexiCap fund is the biggest one.
05:03And it's quite large.
05:05So it looks large because we're managing only one scheme.
05:09But all the restrictions on the cap on how much stocks
05:14you can buy up to 10% is at the AUM level,
05:17not at the scheme level.
05:18So if you were running, say, 15 or 20 schemes
05:21and we like one stock, it had to be divided
05:25across all those schemes.
05:28So that's why it looks big.
05:30So here, we can do everything within this one fund.
05:34So our best ideas are not very diluted, one.
05:38Number two, as long as the market continues to grow
05:41and gets deeper and we grow at the same pace,
05:44I don't think there's anything to worry
05:46about in terms of size.
05:47Well, there's only one thing that
05:49changes with the bigger size, obviously,
05:52is some of the flexibility of investing in smaller cap stocks
05:55and taking reasonable exposure to those.
05:58So for that, I think what we had said earlier
06:01is that we'll have about 25 to 30 stocks in the portfolio.
06:05That's a comfort level.
06:06But because of the size of the fund
06:08and because we can't take meaningful exposure
06:10to small cap stocks in the portfolio,
06:14we'll have a longer tail.
06:15We'll probably get more small cap stocks,
06:19but with a smaller percentage.
06:21So I think if anything changes, that's
06:23what will change, we'll have a slightly longer tail.
06:27Neil, would you believe that having a larger
06:31size is a disadvantage?
06:33Don't say no just because you have a larger size.
06:36I'm really trying to ask you an academic question.
06:38Would a scheme having a very large size
06:42be at a small disadvantage versus a fund
06:46with a smaller size, precisely because of the reason
06:49that you mentioned, that the ability
06:50to take larger exposures or exposures to smaller stocks
06:54becomes a bit constrained?
06:56Yes, definitely.
06:57The flexibility, definitely, for the smaller cap stocks
07:01go down, but we can actually invest pretty reasonably
07:06in the large cap and the mid-cap space.
07:08And obviously, if the foreign limits increase
07:12to about where they were, we can go up to 35% there.
07:15So again, there's a small cap would be around 15%,
07:2220% at max of the portfolio on the higher side.
07:25So only on the small cap, I feel there'll
07:30be a little less flexibility, and we'll
07:32have to get more stocks.
07:33Other than that, I don't think there's
07:34any other difference as such.
07:36What's been your thought in the minds of the AMC
07:39to launch a small cap fund?
07:40Is there been?
07:41I mean, just trying to think out loud.
07:44No, there's no, we don't have any immediate plans
07:47of launching any other funds, actually, right now.
07:50So we prefer a diversified strategy.
07:54I think if there are opportunities, again,
07:57the flexibility should be with the fund manager
07:59wherever there are opportunities, he can go there.
08:01It should be, I think, the way we look at it
08:05is like a swiss army knife, right?
08:06It's one device with multifunctionality,
08:09and that's exactly how we look at our fund.
08:11And we thought that we want to take the confusion out
08:16of the investor.
08:17So you give the money to the fund manager,
08:20and wherever there are opportunities,
08:22we can go there and get those opportunities
08:26in whichever market cap or outside the country also.
08:29So it's a one-stop shop kind of a thing,
08:31and that's kind of the way we like to run
08:34in a diversified kind of a strategy.
08:36Okay.
08:38Neel, generally, just, and maybe in your case,
08:43specifically too, but generally,
08:45how would you explain the strategy
08:49to hold large amounts of cash?
08:52The opinion out here is divided firmly.
08:54For some fund managers, their call is
08:57that we are not given the mandate to hold cash.
08:59We are given the mandate to be fully invested.
09:01And in some cases, people say that,
09:03why shouldn't I take the advantage
09:05of making a tactical call?
09:07Both arguments could hold true.
09:08My question is largely around the size of the cash
09:12that a fund house or an AMC builds out.
09:15What's the, how do you explain that strategy?
09:19Yeah.
09:20So the preference for us is also to be almost fully invested
09:24and for us being fully invested is about 97, 98% invested.
09:28We'll always have two, 3% cash for meeting redemptions
09:32or for those purposes.
09:34Again, we don't force ourselves to invest
09:37and we don't chase stocks if the valuations
09:39are not attractive to us.
09:43And again, if there are no opportunities,
09:47then we are happy to hold some cash
09:50and deploy when the time is right.
09:52We are okay to have some short-term underperformance
09:56during frothy times.
09:57But I think the main thing is to protecting the downside
10:00is something that's very, very dear to us.
10:03I think we don't want big blowups in the fund
10:05or big negative drawdowns in the fund.
10:08And holding some cash when times are a little frothy
10:13makes sense for us.
10:14It's held us in good stead over the last 20 odd years.
10:18So I don't think we'll change that anytime soon.
10:21It also gives the fund manager the flexibility.
10:24He doesn't need to be under pressure to keep investing
10:27if there are no opportunities.
10:29So I think this has worked well for us
10:31and we continue to do that.
10:34And again, having said today,
10:36we are having about 15% cash in the portfolio.
10:40So that means about two or three ideas.
10:43If you get two or three ideas
10:44and have 4%, 5% allocation to those ideas,
10:48then the cash is kind of done.
10:50So it's just a matter of that.
10:52We don't have cash position
10:54for the sake of having cash position.
10:55Oh, if the market is this high,
10:58then we'll have this percent of cash
11:00or on some P levels or something like that.
11:02It's just, it's a destitute position
11:07if there are no opportunities there.
11:09And we're not in a hurry to deploy things
11:11if sometimes they're frothy.
11:15Okay.
11:18The other question would be
11:21the leeway that should typically be available
11:24to a fund manager to deviate
11:25from either the framework set by the fund house
11:30or the performance of the peer set.
11:35Typically, I mean,
11:38because people tend to sort fund houses
11:43by the returns that they've given in a year,
11:46the comparison would eventually end up happening
11:49with the better performing or the best performing funds.
11:51How much leeway should a fund manager have?
11:56Yeah.
11:57So let me just start with the four or five things
11:59that are important for us when we invest in a stock
12:01or the framework that we use.
12:05One is that we want to partner with good promoters
12:10or minority friendly promoters.
12:12We're partnering them for a longer time
12:14and they need to have that track record for that.
12:16So that's the key thing is honest management.
12:21Secondly, we want to partner with businesses
12:24and not just merely purchasing stock,
12:27just a stock that'll go up or down.
12:28So we're not trading,
12:29we're investing it for a long time.
12:32And for that, we need to see if the future performance
12:35of the future business prospects are good,
12:37the return ratios have been good.
12:40So those are the things that are important to us.
12:41Secondly, 30 year preferences for cash rich
12:44and low debt businesses.
12:47We've seen in downturns,
12:48the cash rich companies can really make acquisitions
12:50and really ride the storm and actually grow.
12:53So we like cash rich companies.
12:56Fourthly, some competitive advantage or a moat is important
13:00because that will give it pricing power.
13:02If a company doesn't have pricing power,
13:04I don't think there's much money to be made in those stocks.
13:06So we prefer companies which have good pricing power
13:09and that only happens if the competition
13:11is less in that space.
13:13And lastly, they have to be available
13:14at a good valuation, a good decent valuation
13:17that we feel is right.
13:19So on your question, the leeway part of it,
13:22so let me just give a bit of a cricketing analogy for that.
13:26So a captain or a coach doesn't tell
13:29without fully how to bat.
13:30They tell him to go out there, express himself,
13:33bat with freedom without any added pressure.
13:37So that's one thing.
13:38So similarly for us, when we are telling investors
13:41to stay invested for five plus years,
13:44and then we are kind of gauging performance
13:48of the fund or the fund managers in a short period,
13:50that doesn't work right.
13:52So I don't want to give them short term pressures
13:56on performance as such.
13:57We also, if you're telling investors
14:00to be invested for a longer term,
14:01the fund managers also should get that much time
14:04to perform.
14:05I think that gives clarity to everyone.
14:08I mean, I think having a shared vision
14:11for the fund between the management,
14:13the fund managers, senior people,
14:17it gives clarity to people.
14:18They can do their job in an effective way
14:21without any extra pressures or confusion.
14:24And that's exactly why the cash position is also helpful.
14:28I mean, if you are going to be wanting to be number one
14:31every three months, six months, one year kind of performance,
14:36then you will probably take excessive risk
14:41and you'll probably not make logical decisions.
14:42So sometimes logical decisions to just hold some cash
14:45if the opportunities are not there.
14:47And we are optimizing for the longer term.
14:49We're not trying to maximize for the shorter terms
14:51and that's our strategy.
14:53And I think being on the same page
14:56with the fund managers really helps us.
14:59And that's how we do it.
15:00Just having a shared vision, a shared value system
15:03and a shared philosophy of managing funds.
15:07And I think that will more or less work for us
15:12over the longer term if we're able to do that.
15:14Well, your long-term investors thus far
15:16are certainly very happy with what you've done, Neil.
15:18I hope you can keep up the good work
15:21for a really long period of time.
15:23But thank you so much for taking the time out
15:25and being with us and talking to us about this.
15:28This is much appreciated, Neil,
15:30simply because as I said,
15:31almost every second advisor who comes in
15:36has a thing or two to say about PPFAS
15:39when it comes to portfolio construction,
15:41PPFAS FlexiCap Fund in particular.
15:43So it's great to get your thoughts out here.
15:45Thanks for the time.
15:46Thank you, Neeraj, appreciate it.
15:48Thank you. Not at all.
15:49Well, time to slip into a quick break
15:50and in fact, wrap it up on this leg of the MF Show.
15:52But earnings conversations continue.
15:55Sanjay Kirloskar, CMD of Kirloskar Brothers
15:57joins us on the other side.