Our job is to create wealthy investors, not run after them: Parag Parikh AMC

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Do you recall your initial years in the stock market?

Rajeev: I completed my graduation in 1992, during the stock market boom and the Harshad Mehta period. I was getting familiar with the basic details of companies and the valuations they quote at. The NSE (The National Stock Exchange of India) was yet to be set up. Transactions were voice-based and transfer of ownership through physical certificates would take months. Those were absolutely chaotic days.

I started my professional journey in 1994 in merchant banking, drafting prospectuses for companies coming out with IPOs. By 1996, the market for IPOs had dried up, and after spending a year in corporate finance, I moved to government bonds till 2003.

But equity investing was something I was passionate about since day one. I've been an investor in some form or the other, but professionally managing a very large fund was not something I had thought of in the initial days.

Neil: I remember going to the office on Saturdays and during summer vacations. I grew up with talk about the markets at home. I have vivid memories of the 2000-2001 tech boom and bust. I saw my dad (the late Parag Parikh) very stressed out at that time because he was not recommending the stocks that were going up to his clients. He was stressed wondering if he was doing the right thing, or was he missing something. I joined PPFAS in 2004 in institutional dealing, and then worked on business development.

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What was the first thing you learnt in your initial years in the market?

Rajeev: In my first job, though I was not managing money, I learnt what leverage can do to equity investing. The investment firm I used to work for also invested its own money in the markets.

In equity markets, it is common to invest borrowed money and then square off your positions later. But those days, finance firms used to borrow a sum equivalent to its own funds, and invest in equities. If the markets fell, they would incur huge losses. I could see the effects of leverage and not having the capacity to stay invested in equity positions for the long-term, even if the company was doing things right, even if its prospects looked good.

Just because the market falls, for whatever macro or micro reasons, you would be forced out of your positions because of margin calls or because of mark-to-market losses.

I also underestimated the importance of skewing my portfolio towards equities at that age; an age when you should be invested in equities. I had some money in fixed income investments, which I could have done without.

Neil: In the initial days I just bought stocks based on tips without any thought. I was just chasing hot stocks or buying stocks which people said would go up very fast. But I quickly lost money. I've never done that again.

Can you give us some background into the transition from a PMS into an AMC?

Rajeev: A portfolio management service (PMS) was relatively easy to start, but difficult to scale. Pretty soon, we realised that we were dealing with as many bank accounts and demat accounts and their reconciliation, as we had clients. Also, since there was no central KYC (know your customer), onboarding new clients was a task. For example, in case of non-resident Indians, we would require up to 100 signatures.

In the meantime, the noise around a possible hike in the minimum investment in a PMS scheme was gaining ground. Which meant the middle-income saver would be outside the reach of our services. We always had a mass-market kind of PMS product, it was not only for the ultra-wealthy.

Paragbhai (Parag Parikh, founder of the PPFAS group) always told us if we are portfolio managers, our job is to create HNIs (high net-worth individuals), not run after them. Also, there were some regulatory changes which we anticipated. For instance, PMS providers are not allowed to manage overseas equity investments.

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All these reasons made us think of starting a mutual fund in 2009. It took us four years to achieve that.

Why did PPFAS adopt a value-investing philosophy? What drew you to it?

Rajeev: We follow a Warren Buffett and Charlie Munger kind of investing approach.

We look at companies that someone like (late) Chandrakant Sampat (one of India’s most prolific value investors) would like. Our thinking is influenced by Paragbhai's approach towards behavioural finance, in terms of how we apply investment decisions to the market.

In value investing, you cannot sow something today and expect results tomorrow. It takes time. We made it clear in our scheme’s name itself when we launched it — long-term value fund. Invest only if you have a minimum horizon of five years.

When the mutual fund categorisation rules were announced in October 2017, we had to choose one category — either value or multi-cap. When you choose a category, you have to ensure that your fund complies with the rules of that category.

The value investing approach we have is buying quality companies at a reasonable price. The other value approach is buying very, very cheap companies, low PE or low price-to-sales companies. Hence, rather than getting into a controversy over whether a stock is a value stock, we chose the multi-cap category as that is a broader category and applies to what we are trying to do. So, the name changed from long-term value fund to long-term equity fund.

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Then this new multi-cap guideline came in wherein the multi-cap should compulsorily invest a certain percentage in large, mid- and small-cap stocks. At that time, a new category was created — flexi-cap. We said our approach is more flexi-cap in nature and changed our category to flexi-cap.

Till March 2020, PPFAS Flexi Cap had an AUM of around Rs 3,000 crore. But now it has zoomed to Rs 33,000 crore. What fueled this growth spurt?

Neil: Our consistent fund management approach helped. We did not change our stance. We did not chase fads in the market. In 2017, the Parag Parikh Flexi Cap Fund held 25-30 percent of its corpus in cash even though mid and small-cap stocks were booming. We said we will invest only when we see the right opportunity.

Our annual general meetings (AGM) helped too. Every year, we hold an AGM for all our unit holders. This underlines the transparency in our communication. At the AGM, our investors can ask us any question they like. It created a two-way trust between us and the investors.

After five years, we got the rating and the ranking. The first five years were a start-up phase. Our commission structure was simple and we have always paid one standard rate to all our distributors. Over time people have come to prefer this kind of setup.

In 2020, tech stocks started going up. The US portfolio suddenly became a big focus. While others started launching products around it then, we were doing that since 2010. People saw that and may have thought these guys were doing reasonable stuff, doing commonsense stuff. These things together fueled some of the growth we saw.

As a fund house, what are your views on new-age companies and startups? Would you look at exposure to them?

Rajeev: We do invest in technology companies such as Google, Microsoft, and Amazon. But some of the newer companies, despite being around for a few years, despite being listed, still lack visibility of profits, still depend on pricing to hang on to or grow their market.

We do not know what these businesses will look like once the money that’s subsidising this land grab disappears.

We are closely tracking the newer companies. Some of them will make exciting investments down the road. Rather than buying into a firm very, very early, we prefer companies that have a track record of profitable growth.

Compared to three years back, your overseas exposure has nearly halved to 17 percent due to regulatory restrictions. How have you repositioned the fund?

Rajeev: Exposure to international investments is an additional benefit that our unit-holders have; we like to invest abroad as and when possible. When we used to manage our PMS in the 1990s, most of our investments had been in India. Now, international investing is an add-on to the core Indian equity offering.

We also run the Parag Parikh Tax Saver Fund, where there is no international holding. That also does quite well.

So, as and when opportunities arise, we invest in foreign equities. Otherwise, we deploy our money in the domestic market.

While we are not allowed to remit money outside India to buy fresh stocks, we can buy or sell using the existing overseas portfolio as and when required. We have been reinvesting the dividend received from overseas investments in foreign stocks. We have sold Suzuki ADRs and we have redeployed that in tech companies. So, some action is there in the foreign portfolio as well.

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After the change in taxation rules, the gains in pure international funds are now taxed at your marginal rate of taxation. There's no indexation benefit. There's no long-term capital gain benefit. LRS also has been tightened with 20 percent tax collection at source (TCS), which makes it difficult for people to directly invest in international equities. However, someone investing with us gets a 17 percent exposure to foreign stocks in a tax-efficient manner. We have to operate in the environment that is given to us.

We're hopeful that these rules will change someday in the future.

Can you list your biggest hits and misses?

Rajeev: In the last decade, Maharashtra Scooters and Bajaj Holdings & Investment have worked for us. We owned Maharashtra Scooters initially, which we converted to Bajaj Holdings & Investment. These have been among the biggest contributors to our performance.

Over the past 10 years, Indian stocks have fared better than foreign stocks.

Stock which did not do well was Noida Toll Bridge. Because of the court ruling, the company had to make the bridge toll-free and that changed the revenue model.

Within a month of buying Apple Inc, Berkshire Hathaway announced that it was buying into the company, so the stock price shot up, and then corrected. So we were able to top-up a little. But we were not patient enough to hold it for a very, very long time. We got double our purchase price in a short while, and then we sold it.