The Mutual Fund Show: Should You Invest In A Fund With International Exposure?
Parag Parikh Long Term Equity Fund returned 14.5 percent gains to investors in 2019.
2019 was a year of uncertainties for Indian equities. And while the Nifty 50 and Sensex scaled new peaks, money managers struggled to make profits in the broader markets.
Among the ones that did beat the broader indices is the flagship scheme of PPFAS Mutual Fund. The Parag Parikh Long Term Equity Fund returned 14.5 percent gains to investors last year compared to 9 percent managed by its benchmark—the Nifty 500 Total Return Index. It’s secret sauce? Overseas investments.
“Up to 35 percent of the funds’ assets can be invested overseas,” Rajeev Thakkar, director and chief investment officer at PPFAS Mutual Fund said on BloombergQuint's weekly series The Mutual Fund Show. “This safeguards it from any adverse impact from events such as demonetisation in the Indian markets.”
Thakkar said that their fund’s success in 2019 was due to the relative outperformance of U.S. market compared to India. And that’s why he thinks parking a portion of your corpus abroad makes sense for money managers.
Having a mix of investments across geographies helps in reducing the volatility of the scheme as well as potentially enables outperformance when one particular market is not doing that well.Rajeev Thakkar, Director & CIO, PPFAS Mutual Fund
The fund also does not look for niche bets overseas. Instead, its top picks are generally well-known bellwethers like Google’s parent Alphabet Inc., Amazon.com Inc. and Facebook Inc.
“People would think that the Googles and Facebooks of the world would be in bubble territory and this is the second version of Dotcom boom,” Thakkar said. “Actually, these companies which are growing at around 28 times are above 25 times earnings. They are growing at faster levels and are valued cheaper than many of the Indian companies.”
But that’s not the only success mantra for the fund. Watch the full show to find out.
Here are the edited excerpts of the interview...
Can you tell our viewers a bit about your fund? Let’s start off with the fact that it is a multi-cap fund, but can you tell us a bit more about it?
As you mentioned, it’s our flagship fund and in 2013 when we launched, we said we want a simple product for the investors which can invest across market cap, across sectors and across geographies. We didn’t want to confuse investors with flavour of the month kind of mutual fund schemes where every month, you have some new launch or the other coming up. We had a situation which was threatening to be like this where the number of equity schemes would be more than the number of investable stocks in India, if SEBI had not come out with the categorisation of mutual fund schemes. So, rather than telling the investor buy a large-cap fund now or small-cap fund now, the fund itself can take those calls and it is a well-known fact that different countries go through different cycles and have performance over different time frames. For example, the period 2000 to 2010 was India’s decade. In 2010-2020, U.S. has done much better than India. So, having a mix of investments across geographies helps in reducing the volatility of the scheme as well as potentially enables outperformance when one particular market is not doing that well.
So, having a mix of investments across geographies helps in reducing the volatility of the scheme as well as potentially enables outperformance when one particular market is not doing that well.
So, a mix of all these factors helped us do well.
You invest across market caps or across sizes and you invest across geographies as well? So, India is X percentage and global equities are X percentage. Are they remitted to particular geographies or do you invest worldwide?
So, minimum 65 percent of the fund’s corpus is invested in India. What this does is, it classifies the scheme as an Indian equity fund. This scheme becomes long-term investment after one year of holding and its tax rates, beneficial rates of a 10 percent after a one-year holding. Up to 35 percent can be invested across the world but largely, we are restricting ourselves to North America, western Europe and developed Asia.
So, we are not going into exotic countries. We are restricting ourselves to global multinationals. Well-known companies which the investors would generally be familiar with.
So, you invest directly into these companies and not via a fund of funds structure?
That is correct.
A lot of people find it difficult to just track companies within a particular geography that they are in. How do you get the confidence that you will be able to pick the right stocks in these global geographies? The U.S. itself is such a large market, but you do the U.S. in addition to India, and as I heard you say, western Europe and some parts of Asia? How do you get the confidence that will be able to go out and pick the winners in that segment? 35 percent is also a fairly large proof percentage of money going.
True. So, today whether we like it or not, and even if one is a pure Indian investor, one has to be a global analyst in one way or the other. I’ll tell you why. If you are analysing let’s say, ONGC. The profits of ONGC depend on global crude prices and ONGC is not that different from let’s say, Exxonmobil or a Saudi Aramco in that sense. If you are analysing Wipro, Infosys, or TCS, the analysts covering these companies are anyway looking at Accenture and Cognizant in the U.S. Generic pharma is a global play and not an Indian play. Tata Motors depends on Jaguar Land Rover more than their India operations. So, sector after sector, company after company these things play out.
So, our research is structured on sectoral lines. The sector analyst in India looks at the Indian companies as well as global companies. That enables us to arrive at some conclusion about the valuations and the business aspects. We don’t go to any niche businesses. So, some company which has only U.S. operations and which is in a sector not familiar to us, we would stay away from such businesses. Let’s say if you are looking at Nestlé, the parent company versus Nestlé in India is not that different a company and since Nestlé has global operations, whether you are sitting in Switzerland or in U.S. or in India everyone is at the same advantage-disadvantage as far as analysing Nestlé goes.
You mentioned that 35 percent is on the on the global shares and minimum 65 percentage is in India. The question we ask a lot of global investors as well as the sell-side global guys who are asking investors to come to India is that, they want to come to an emerging market like India because growth out here is much higher. Are you saying that despite the plethora of opportunities available here, there are companies on the global front which might give you higher growth? With the presumption that you invest for growth at a reasonable price, they’ll give you higher growth than what is available in India or is geographical diversification the key reason why you are doing this?
So, you have asked a wonderful question and there are two or three points here. First, the growth of a particular company depends on the maturity of that particular sector and the size of opportunity rather than the geography that company is in. So, I mentioned ONGC earlier. Now, the growth of ONGC would depend on how many oil wells they can drill successfully and what production increase they can do and it has nothing to do with India’s GDP growth rate. Again, a lot of the new age sectors where Indians are participating as consumers, are not in the listed space in India. For example, we do don’t have a cell phone company listed in India.
The Xiaomis and the Apples and Samsungs of the world are listed outside of India. In the e-commerce space, there are no meaningful listed companies in India. Amazon is listed globally, Walmart which owns Flipkart is a global company. Google, Facebook are global companies. So, a lot of these companies are having growth rates of 20 percent-25 percent. So, it’s not necessary that every Indian company is a fast-growing company and every U.S. company is a slow growing company.
Second, people have this thing that India is an emerging market country so India’s returns will be better than global returns which is not true for last one, three, five year, 10-year returns. So, the decade of 2010 to 2020 has been more of an American decade than an Indian decade.
I think that there are enough examples, right? Google versus Nifty in INR terms and there is ample justification out there that a large global company could at times do as well or even better than an emerging market economy as well. Would you want to dwell on that?
So, one is when people compare returns across geographies, what people miss out on is that the Indian rupee typically depreciates 4-4.5 percent per year.
When you do that, the U.S. S&P 500 has done much better than Nifty in India over, as I mentioned, 1-3-5 and 10 years. The technology companies have done much better than the S&P 500. So, obviously Nasdaq has done much better than S&P 500.
The other thing that people normally think about and wrongly so, is that all these companies would be very expensive. So, people would think that the Googles and Facebooks of the world would be in bubble territory and this is the second version of Dotcom boom. Actually, these companies which are growing at around 28 times are above 25 times earnings. So, it’s not that they are very expensive, especially when we compare them with the FMCG kind of valuations in India. They are growing at faster levels and are valued cheaper than many of the Indian companies.
They are growing at faster levels and are valued cheaper than many of the Indian companies.
Is that the reason why you look at this bottom-up style? I am guessing that your portfolio would therefore, and correct me some wrong, not mirror any key benchmark in that sense. Sectoral terms or otherwise. A lot of people benchmark their Indian portfolios to, let’s say, the 40 percent weightage that financials have and therefore, they are near about there- 35 to 42- 43 percent and try and keep it that way. You would not be doing that and may be with reason because in your opinion, your largest holding is HDFC Bank and the kind of returns that has given vis-à-vis the benchmark or a mid-size company like Bajaj Holding and that has given in the kind of return that has given vis-à-vis the benchmark for the markets, are testimony to the fact that it may not necessary pay to mirror the indices?
That is correct. So, we are neither contrarians not consensus-driven people. We are bottom-up stock pickers. So, HDFC Bank may look like a complete consensus stock pick where HDFC Bank is a top pick for a lot of mutual fund schemes and it’s one of the large holdings even for us. At the same time, something like a Bajaj Holdings does not figure in anyone’s portfolios whereas we have held Bajaj Holdings in Maharashtra Scooters for a very long time. Again, we would be buying some of the small and mid-cap companies—such as Zydus Wellness. So, we’ll evaluate each company on its own merits, and we are not driven by whether a stock is in the index or out of it and what are other people doing with the stock.
Would it be fair to assume that the pattern of your buying is not necessarily based on what is necessarily the trend right now? You would really look at the long-term picture and therefore, even the mutual fund shouldn’t be analysed it that way. They do get analysed for example on a yearly basis as well with how much the NAV has moved for a one-year period and not necessarily, for one, two or three months. Would the pattern of your buying would not be necessarily from a one-year perspective?
Absolutely correct. So, in all our communication, we highlight the fact that the scheme is suitable only for people looking at five year plus kind of investment horizons.
Very simply, the scheme tends to underperform when Indian markets are doing much better than the global markets. So, after the 2014 general elections, we were lagging the Indian market because about 30 percent was invested overseas.
At the same time, any adverse effect on the Indian markets is not fully reflected in the portfolio. So, that is the period of outperformance. So, demonetisation or a GST would not affect the global component and that would be resilient to the internal factors affecting the Indian markets.
So, looking at it from a one-year perspective may not be the right thing to do, especially for our scheme.
We look at business trends rather than stock market trends. So, when a lot of advertising is shifting to digital mediums, when a lot of retailing is shifting to e-commerce, so we are cognizant of those kind of trends but we don’t look at what is happening to popularity in the stock exchanges or what are other funds doing. That is not a criterion when we look to invest.
How has this strategy paid off over the last few years? We have got some data of what the last few years’ performance has been versus the Nifty TRI. Can you tell us how and why has that happened and what is the kind of confidence that you have for the next multiple years but also the next year, the current year which is 2020, which promises to be full of events that could determine what the world markets do at large?
So, as I mentioned, year-to-year, the performance can be either higher than the Nifty 500 TRI or lower than that. 2017, when the broader markets were doing very well and where it was a complete small and mid-cap driven rally, that time we had some amount of liquidity in the fund and again we were not only in small and mid-cap space. We were broadly lagging the Nifty TRI but that was more than made up in 2018-19 as the broader market went into a turmoil and we could do well. So, depending on the time frame, we have done better than the benchmark and the category overall over the last one, three and five years.
Would you believe that, that’s the kind of outperformance that you would be able to continue and in order to do that, would you make changes to the standard of your fund? Would you take a higher than 65 percent exposure to India and reduce the global exposure? Would you take a higher than what is the trend for your fund exposure to mid caps and small caps versus large caps? How do you think you navigate through the next 12 to 24 months?
So, every active fund has this attempt to do better than the benchmark and to really do well within the categories. So, our attempt will be that. But obviously, there are no guarantees in a market-linked product. Strategy would largely be the same. We are looking at a mix of Indian and global companies to have a wider opportunity as well as to lower the country specific volatility.
So, unless there is a scenario where foreign stocks are extremely overvalued and Indian stocks are very attractive, typically this 65-30 kind of weightage would continue.
You don’t think that’s the case right now?
I think, in fact, in some cases foreign stocks are cheaper than comparable Indian stocks. So, at least right now there is no reason to cut down on the foreign investments. So, that would continue and weightage to small and mid caps, we are looking at that space and in fact the last stock we added was from the small and midcap space. But it won’t be a very dramatic shift. It will be largely driven by the opportunities which come our way.
But this 65 percent Indian component, if that was to be 100 percent of the fund, how much of it in that multi-cap scheme, skewed towards large caps? How much of it is mid cap and small cap and I presume as you said, that will continue?
So, about 65-70 percent or sometimes close to 80 percent is in large caps. The remaining typically is in the small and mid-cap space.
Would you change that? You don’t think so that 2020-21 could be the year of broader market performance?
It could be. So, we keep looking at the broader market for opportunities and we do invest in stocks which come our way. I think somewhere this whole narrative that small and mid-cap space is so beaten out is largely driven by the peak level seen in 2017. So, if you plot a graph from December 2017 to date, that is correct. Small and mid caps have been beaten down. But if your starting point is 2014, then both are almost at power. Large cap versus small and midcap. Again, some of the false were driven by governance issues in the small and midcap space. So, not every fallen stock is an opportunity. One has to be selective about what one buys.
If you want, you can speak about some of the global holdings as well for people who want to get a flavour of what kind of companies are you looking at, but when I look at Indian portfolio, there is a bend towards, correct me if I am wrong, some sensitive elements too, because you have, via some of your largest holdings, a direct or an indirect exposure to interest rate movements, autos, financials or a holding company which has got financial names within itself. Do you think that is something that has work for you and therefore you would continue doing it? Would you enhance it? Would you bring it down? How are you are approaching that?
Yes, you are right that we have increased exposure to autos within the last 12 months. So, Hero MotoCorp is something we added to our portfolio in the last year and Suzuki—the Japanese company, which is effectively participation in Maruti in India. These two were added in the last 12 months. Has it worked for us? Not yet because auto still has to see recovery. But we have bought it from a three-to five-year perspective. When we purchased, we clearly knew that near term is very gloomy with all the BS-VI introduction, slow GDP growth and excess inventory at dealer levels and all of those factors. So, we have clearly bought it with a slightly longer horizon. The remaining portion which is financial services, HDFC Bank and the Bajaj Holdings exposure is largely consumer lending kind of thing, which is not that rate sensitive or cyclical. The investment in things like ICICI Bank and Axis were made because we saw that NPA cycle was close to ending. So, these have turned the corner in my opinion and even the stock prices are reflecting that fact.
When you have such a high weightage in say, a company like HDFC Bank and this is not a call from you any fashion or recommendation. I am just trying to understand the rationale here. Is it trying to also live up to the fact that by virtue of having HDFC Bank at such a high percentage, you had exposure to the financial space in a big way or is it a bottom call that—irrespective of what weightage it had, the business is so good that it will give you the returns that you want. I am just trying to understand the rationale for owning such a high piece in a financial name.
So, our view on private sector banks has been positive for a while. These are still 30-35 percent of the overall market. So, PSUs are still about two-thirds of the overall banking space. Now, they have had issues in terms of their past bad loans. Further, even banks which are doing well periodically get saddled with mergers where they have to absorb the banks which are not doing so well and then they go through the integration issues and things like that. If we say India will grow at 5-6-7 percent GDP and if inflation is going to be 5-6 percent, in nominal terms we will be growing at 10-12 percent. That, one would expect to be the growth in the banking sector in terms of money supply. Plus, if private sector players can gain market share of one or two percentage points, now that would be a good growth on the balance sheet side. Also, these are the players which are benefiting from distributing mutual funds, from selling life insurance policy, from selling foreign currency to travelers and all those kinds of things. So, all and all, it is a good business. The main risk in the space is on the lending side. Now, anyone who has a great track record of doing well on the lending side and where the credit culture is very strong, I think deserves the premium that HDFC Bank gets. So, that is one. Now, there are other players with good credit culture like Kotak Bank or Bajaj et cetera. They don’t have that much of a benefit of low-cost deposits. So, HDFC Bank is not only great on the lending side but also their CASA, given that they pay nothing on current accounts and 3.5 on savings account, that also is positive. So, all in all, weightage is reflective of the equality of the business that they have.
Onto the global, your buying, has been bottomed up and not necessarily driven by trends. Where is your maximum exposure in terms of geographies and are you picking in choosing business to stick with them for a really long term or are you fairly active? In your past, what has been? The last one year has been fairly active in terms of churning as well because of the way the markets have been or are these really long-term bets that will last despite what happens to market conditions on the global front?
These are really long-term players. So, sales are very rare both in Indian and global portfolios. Not that we haven’t sold, once in a while we do have a sale transaction. The larger holdings have been there for a long time, especially top holding which is Alphabet/Google. It’s been around 10 percent and it’s been there almost since its inception.
10 percent of foreign holding or 10 percent of the overall portfolio?
In the overall portfolio. So, that is one large holding that we have. Amazon is a more recent addition. So, it was a miss in the earlier days, so it is a little bit of late arrival. To our credit, we bought it before Berkshire had it. Maybe some brownie points come our way for that. But essentially, we understood the traction the cloud businesses are getting and that’s where we purchased Amazon. Facebook has been there for a while now. We bought it when the stock crashed after the Cambridge Analytica issues. We bought some more and now again it’s at all-time high. So, it gave us a scare in between but the underlying business was good throughout the controversy. So, actually it was good in the way that it gave a buying opportunity at lower prices.
But most of your holding are long term in nature out there as well. You’re not looking to actively churn.
We are not looking at churning in any meaningful way.
Are you sitting on any kind of cash or have you sat on any kind of cash in the last 12 months? Do you take those cash calls or do you typically remain fully deployed?
As of date, we would be around 11 percent in cash plus arbitrage. At peak, this was in 2017-18, we were as high as 30 percent.
You are sitting on 11 percent because you deployed cash and therefore that has come off or are you actively increasing seeing cash/arbitrage because you are waiting for opportunities?
We have not increased actively. In fact, we have been deploying over a period of time. At most times, we would have roughly 5 percent cash but because that would take care of the inflows and outflows, and we would not have to disturb the core portfolio too much. So, another 6 percent to deploy I would look at it that way.