Parag Parikh Flexi Cap Fund (PPFCP), which recently completed 10 years of existence, is among the biggest equity schemes in India with assets under management (AUM) of over Rs 33,500 crore. It has been a fairy-tale ride for the mutual fund (MF) scheme, which started with an AUM of just around Rs 150 crore.
PPFAS Mutual Fund, which also turned 10 as the flexi cap fund was their first offering, started off as a stock broking house in the early 1990s. Parag Parikh, who passed away in 2015, had founded it.
PPFCP has been a major hit among investors as the scheme’s assets have ballooned from around Rs 3,000 crore in March 2020. Data shows that it is the best-performing fund in its category over a five-year period.
While the fund has benefited immensely from its true-to-label approach and allocation to US equities in the past, experts highlight key challenges that the scheme might face after becoming large in asset size and the restrictions on overseas investments. We delve deeper.
A strong pedigree
Starting off as Parag Parikh Long-Term Value Fund, the scheme has seen name changes to long-term equity fund and then finally to PPFCP because of regulatory changes during its course.
But one thing that hasn’t changed is the fund management style.
Rajeev Thakkar, Chief Investment Officer (CIO) and Director of PPFAS Asset Management Company, recently told Moneycontrol that they have always followed the Warren Buffett and Charlie Munger style of investing.
“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,” he said in an interview.
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The investment decision at the fund house has been influenced by Parag Parikh’s approach towards behavioural finance.
Mutual fund distributor Shiney Sebastian, who joined Parag Parikh group when it launched the Portfolio Management Service (PMS) in 1994, attributed the fund’s success to its management style.
“Parag bhai’s focus on stock research, stress on quality, love for value investing and use of behavioural finance has helped him immensely. This is something that he has been able to successfully pass on to this team. This has driven their success over the years,” said Sebastian, Managing Director at Affluenz Financial Services.
A stable portfolio mix
PPFAS has been among the earliest funds to take exposure to US equities in a big way.
“While others started launching products around it later, we have been doing that since 2010,” said Neil Parikh, Chief Executive Officer (CEO), PPFAS Mutual Fund.
Data from Ace MF showed that PPFCP, during its existence, had an average 25 percent exposure towards overseas equities, with the highest level of around 33 percent during May 2020.
“They always wanted to be more concentrated with 25-30 stocks and a blend of international exposure. What has worked for them is, no doubt, the allocation towards US stock markets, which was a unique proposition when they started it. Also, the timing helped them because the US stock markets had done very well till the beginning of 2022,” said Harshad Chetanwala, Co-founder, MyWealthGrowth.com.
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Another aspect that has worked in the scheme’s favour is sticking with its conviction.
While most fund managers like to churn their portfolios, PPFCP’s investment approach has largely been to Buy and Hold. Data shows the portfolio turnover ratio (excluding equity arbitrage) of the scheme was just 3.99 percent for the month of April. This means that the fund replaced around 4 percent of the companies it held in the last year, which is considerably low among all equity schemes.
Notably, the scheme has been holding Axis Bank and ICRA since its inception. It has held ICICI Bank since May 2014 and Ipca Laboratories since November 2014.
“There are a couple of things that have worked in the scheme’s favour. One is discipline, and the other is consistently remaining true to their label,” said Deepak Chhabria, CEO, Axiom Financial Services.
Emerging challenges
While the fund has been the favourite of financial advisors, certain challenges are seen emerging for the scheme.
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When the US markets started correcting from early 2022 onwards, the fund passed through a tough time. Further, the fund was unable to benefit from the beaten-down valuations and deploy further funds to that market because of regulatory restrictions.
In February 2022, the Securities and Exchange Board of India (SEBI) asked mutual funds investing in overseas securities to stop further investments in foreign stocks to avoid a breach of industry-wide overseas limits imposed by the Reserve Bank of India (RBI).
Consequently, the overseas exposure of the fund has fallen to around 17.2 percent in April, with additional money going to domestic stocks.
“At Rs 33,000 crore, if you can't deploy a lot of money in US stocks, it will definitely be a problem from the allocation perspective. Second, the fund is highly focussed on value investing, which can make it underperform the market for a long time. Since the fund is popular and a lot of money is coming into it, deploying funds will be a challenge because you cannot invest more than 10 percent in a particular stock. Hence, deploying in the concentrated bets where they are happy making allocation, will always be a problem,” said Kirtan Shah, Founder of Credence Wealth Advisors LLP.
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Another challenge that experts see the fund facing is its large size. PPFCP is among the 10 biggest equity funds in India and the second-largest in the flexi-cap category.
“The challenge is going to be visible when for some reason the performance slows down and coincides with a market slowdown or consolidation. It will be interesting to see how the fund handles the redemptions then. Large funds also can’t really be nimble-footed and they may have a little more cash holding, which can impact short-term returns. Also, large funds tend to be more large-cap biased because of the market liquidity. Sustaining the outperformance may be a challenge till overseas investing limits are relaxed,” said Chhabria.
Trust the management
Despite the challenges, the scheme continues to be a favourite with investment advisors.
“I am very positive about the management and their value system. The values that the late Parag Parikh incepted long back are clearly seen in his son (Neil Parikh) and the organisation. Also, Rajeev Thakkar follows the same methodology. Going forward, we can expect the same consistency in their philosophy and framework which has led to their success,” said Rushabh Desai, Founder, Rupee With Rushabh Investment Services.
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Experts also believe that the large size of the fund shouldn’t be a concern due to the growing Indian market size and more opportunities arising in the mid-cap and small-cap spaces.
“I'm quite confident that the fund manager and the management team are capable of handling the challenges, and being a big fund should not pose a challenge to them. Even managing a scheme with assets worth Rs 50,000-60,000 crore should not be a problem, as the market cap of Indian stocks is also going up and liquidity is improving,” said Chhabria.
(Dhuraivel Gunasekaran contributed to the story)
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