PGIM India mutual fund has gone through many changes. Launched in India in 2010 by US-based Prudential Financial as Pramerica Mutual Fund, it entered into a joint venture with DHFL group and was renamed as DHFL Pramerica Mutual Fund in 2015. Then, in 2016, it acquired DWS India AMC. And in 2019, Prudential took full control back and took the PGIM India Mutual Fund avatar. The fund house is showing signs of being a serious performer with a few of its equity funds doing well.
Vatsala Kamat caught up with Aniruddha Naha, Senior Fund Manager at PGIM India Mutual Fund to understand his investment philosophy. At this point, he finds value in financials and industrials, while stating that one must watch the bond yields space carefully. Excerpts.
PGIM funds have been topping the return charts. What is your winning strategy?
The whole economic cycle of the past 2-3 years was good for us. We started building our portfolios in 2018, when the market was narrow. But we saw value in some good businesses in the mid and small-cap segment. Our belief was that equity markets had to widen up at some point. So, we built the portfolio with 20 to 25 percent small-cap stocks.
After we identify businesses and opportunities in the value chain, we choose companies that are most capable, have good management track record, decent size, market share, good technology and some capital to participate in growth opportunities.
We like companies with healthy balance sheets and strong operating cash flows from the business. They should not have had any corporate governance issues.
What do you do when valuations are expensive and target prices are already reached?
It is a challenge. But we have a method of booking profits. We look at businesses where the future three-year earnings justify the price at which a stock is trading. But, we exit stocks when the PEG (Price-to-Earnings Growth) ratio moves beyond 2.5 times. We adopt this system in all the funds that I manage – PGIM India Flexi Cap Fund, PGIM India Midcap Opportunities Fund and PGIM India Balanced Advantage Fund. Therefore, this time around, we had to sell some stocks that reached these levels faster-than-expected.
But have you been able to find opportunities to invest in at these levels?
Yes, absolutely. For instance, in April-June 2020, during the full lockdown period, we found opportunities in auto and auto-ancillary sectors that were completely disregarded at that point. Again, in September-December 2020, commodities such as metals, rubber, carbon black for instance, looked attractive. We found companies with clean balance sheets and healthy cash flows, but whose profit and loss accounts were disrupted as it was the bottom of the cycle. Such decisions helped us.
At this point, we are now looking at opportunity in financials. Valuations are okay, asset quality issues are getting sorted out and growth is coming back. We also like Information Technology, where we believe it is structurally well-poised for the next two years. I also think that industrials and cement are good to play the investment cycle, which will come back over the next two to three years.
What does the $1.9 trillion stimulus in the US mean for global and Indian markets?
The stimulus package is almost double the size of the earlier version. Bond yields in the US moved up fast because the bond auctions were muted. But the higher yields also dampen foreign flows into Indian bonds, as these foreign investors find US bonds yields attractive. We’ll have to wait and see. The US 10-year yield moving above 2.5 percent would make us cautious.
Who are your investment gurus?
Seth Klarman, for his thought process on equities. His book, Margin of Safety, gives insights into picking stocks at the bottom, when you look for good businesses going through bad times (for instance, metal stocks). And Ralph Wanger, for his approach towards small and rapidly growing companies, with good value.