In conversation with Raj Mehta, Fund Manager at PPFAS Mutual Fund
Q. The equity market has been range-bound since February 2021 and seems to be directionless. What are your thoughts on the same and where you think the equity market is headed?
A. Since February 2021 to date is a very short time period, it is very difficult to comment on it. If you see from March 2020 lows, the index has almost doubled, leaving aside individual stocks. Post this kind of a move, there will be periods where you don't see much happening, which is natural. Over a longer period of timeframe, I think a few steps taken by the government in the last year are really encouraging like increasing fiscal deficit to spur growth and privatisation of few PSUs except for some strategic companies. If you see the earnings growth in a lot of companies, it has been really encouraging. If the earnings cycle continues to remain upbeat, we could be in for a good few years. After all, market returns move in tandem with the earnings growth of the constituent companies.
Q. Which pockets in the equity market still look attractive and how investors should approach investing in them?
A. There will always be some pockets that will be frothy while others would seem to be attractive at any point in time. Even within sectors, there are some stocks that are ignored and some which are bid up. On a sectoral basis, we think technology, non-lending financials, and automobiles are something that looks attractive at this point in time. In technology, we have seen that we have skipped a year or two in terms of adoption from the customers' post-pandemic, given that everyone was forced to work remotely. It continues to be an interesting space. Over the last year post-pandemic, we took a tactical call to reduce the allocation towards lending financials, which are typically leveraged and shifted that allocation towards non-lending financials, which are a play on the financialisation of savings theme. Automobile companies have very strong balance sheets, coupled with good capital allocation. In the last few years, the volume growth has been disappointing but post-pandemic, we have seen some shift towards personal mobility, and it remains a structural long-term trend.
Q. The US 10-year bond yield is trending higher since August 2020 and is currently trading near the levels of February 2020. So, what impact does it hold on funds having exposure to US-specific stocks?
A. Obviously, a spike in the US 10-year bond yield is a growing concern and one needs to keep an eye on it. Fall in bond yields globally is something that has helped the valuations of companies all over the world. In investing, when most of the investors use discounted cash flow method for valuing a business and as the discount rate used to discount the future cash flows reduces, the valuations of the businesses increase and that is what we have seen globally. The recent spike in bond yields might just be a short-term aberration as the Fed has consistently said that there would not be any rate hikes in the near term. Over the longer term, this variable needs to be tracked very closely and as we see, with inflation coming back some years down the line, we will eventually see the yields going up as well. Just to put it in context, the rising bond yields don't necessarily mean it is bad for markets. A very steep hike in yields is something that is difficult to cope with and needs to be tracked.
Q. Parag Parikh Flexi Cap Fund (erstwhile Parag Parikh Long Term Equity Fund) is your flagship fund, and it has performed quite well among its peers. What are the factors responsible for such a performance?
A. There are three main reasons for this outperformance. One is the foreign diversification that we have within our portfolio, which gives better risk-adjusted returns given that you are diversifying across geographies and not all markets move in tandem at all times. The second is taking cash calls at certain points in time. Sometimes at the top of mid & small-cap rally in 2018, we were at around 30 per cent cash and we literally ran out of cash post the COVID-19 crash in April last year. The third is the lower drawdown in all the market falls. What this does is the portfolio takes less time to get back to where it was and then the compounding takes over. So, if you look at our downside capture ratio, which particularly captures this, it is very impressive.
Q. Your ELSS, as well as Flexi-cap fund, are quite concentrated with investments spread across less than 25 stocks. So, doesn’t such a concentration increase the risk? How do you manage such risks?
A. If you have less than five stocks in a portfolio, I would call it a concentrated portfolio and if you have more than 50 stocks in the portfolio, it is a very diversified (Di-worse-ified) portfolio. Somewhere in between the two situations, there's a sweet spot. We believe 25-30 stocks is that sweet spot for our portfolios and since inception, we have kept the number of stocks around that only. The long-term goal is to keep the number of stocks to a similar level but as we grow in size, there will be a small increase in the number of stocks as getting volume in a few small-cap stocks becomes a little difficult beyond a certain size.
Q. When it comes to the style of investment, which style do you prefer the most, growth or value, and why?
A. Value and growth both have to work together. The definitions of value and growth differ from investor to investor. Value stocks need to have growth embedded in the value and at the same time, growth stocks need to be invested at a reasonable price (value). I would not put myself in any bucket, but the ultimate aim is to maximise risk-adjusted returns in a consistent manner.
Q. What will be your advice to retail investors now?
A. My advice to retail investors is very simple. Stick to your asset allocation, decide the funds based on your asset allocation and continue your SIPs in those funds irrespective of what the macro situation is or where the market is. Over long periods of time, money will work for you and your stated goals will be achieved. The whole purpose of doing an asset allocation should be to achieve the goals, which any investor has listed down instead of making a slightly higher return than what their neighbour has.