Directionally it is a positive that we are focussed on improving the attractiveness of India as a business destination

BFSI Industry Interview
On: Oct 10, 2019 | From: Advisorkhoj Team
BFSI Industry Interview in Advisorkhoj - Directionally it is a positive that we are focussed on improving the attractiveness of India as a business destination

Mr. Rajeev Thakkar : Possessing over two decades of experience in various segments of the Capital Markets such as investment banking, corporate finance, securities broking and fund management, he is currently the Chief Investment Officer and Director at PPFAS Mutual Fund

His association with PPFAS Private Limited (The Sponsor of PPFAS Asset Management Company Private Ltd.) began in 2001. He was appointed the Fund Manager for the erstwhile flagship scheme of the Portfolio Management Service, titled "Cognito" in 2003.

He is a strong believer in the school of "value-investing" and is heavily influenced by Warren Buffett and Charlie Munger's approach.Apart from his technical ability, what distinguishes him from many others is his ability to stand his ground and remain unflappable during difficult times.

He is a regular contributor to Mint newspaper and has also appeared on business channels such as Bloomberg India TV and ET Now.

He is a qualified Chartered Accountant, Cost Accountant and CFA Charterholder.

What is your assessment of the state of the Indian economy and the stock market at this point? Is the current economic situation purely a consequence of economic cycles, which can be addressed through fiscal and monetary measures or do you see structural issues, which may require structural policies to fix?

While we are cognisant of macroeconomic issues and stockmarket valuations in general, we are not unduly influenced by them. Having said that the current disappointment appears to be on account of rhetoric outpacing reality.

While there are some long-pending structural impediments (such as lack of labour reforms, apparent infringement into RBI's autonomy, etc.) on the whole cyclical issues seem to be dominating some key sectors such as automobiles.

The broad stockmarket is in a manic-depressive mood, with sporadic bouts of announcement-led exuberance followed by a slow deflation, weighed down by global and local factors.

This is as good a period as any, to bite the bullet and embark on difficult structural reforms and some of them like disinvestment / privatisation seem to be on the horizon.

What are your views on the tax related and other fiscal measures announced by the finance minister over the last month and half? Do you think more measures will be required to revive economic growth? Will there be an impact on our fiscal deficit and bond yields thereof?

Directionally it is a positive that we are focussed on improving the attractiveness of India as a business destination. Our corporate tax rates are not competitive. For these measure to reflect on the ground it may take a while.

The tax cuts may not be the only measure and already one is getting a sense that there may be some other measure like an increase in the pace of selling of government holdings in PSUs to raise resources. The government is cognisant of the impact on deficits and there may be some alternative revenue raising measures. The bond borrowing program announced does not seem to indicate an enhanced resource raising need from borrowing.

What are the global risk factors for equity investors in India?

The ones currently on the horizon are:

Impending trade war between USA and China sucking other countries in...

The (admittedly far-fetched) spectre of President Trump's impeachment

Fluctuations in the oil price owing to the Saudi related supply dislocation.

The perennial battle against deflation in the Eurozone.

What is your outlook on earnings growth over the next 3 to 5 years from FY 2020 onwards? Reduction in corporate tax rates will obviously have an impact on EPS, but what in your view, will be other drivers of earnings growth in the moderate term?

We usually refrain from indulging in predictions. Also, the past few years have wrong-footed so many analysts that such predictions have ceased to have any meaning. We are quietly confident regarding the earnings potential of stocks within our portfolio, though.

PPFAS Mutual Fund is well known among informed investors and financial advisors as proponents of Value Investing. Stocks in the midcap and small cap segments have been hurt the most in the last 18 months or so. Are you seeing attractive investment opportunities in the midcap and small cap space?

While we do not ignore liquidity, market capitalisation of a portfolio choice per se, is more of an afterthought. We will continue to choose stocks based on qualitative factors, filters and screens. Yes...we concur that that the mid and small-cap segment on the whole, has witnessed some carnage. However, a spectacular run-up has preceded this fall. In any case, we will not base our decisions merely on that premise.

For the benefit of Advisorkhoj readers (both retail investors and independent financial advisors), please explain your stock selection strategy, with particular emphasis on Value Investing.

In a broad sense, our process involves:

1. Identifying investments

2. Undertaking our research and reducing the choice set.

3. Comparing valuations

4. Constructing the portfolio

While doing so, we also adhere to Regulatory and internal guidelines regarding size of the Position, and other money management / liquidity related safeguards.

More details can be found here.

In the last two years (ending 26th September 2019), Nifty gave 4% CAGR return while Dow Jones Industrial Average (DJIA) gave 10% CAGR return in their respective local currencies. If we factor in depreciation of the INR versus USD over the last 2 years, then outperformance of DJIA versus Nifty is much larger. Parag Parikh Long Term Equity Fund is one of the few diversified equity schemes (enjoying equity taxation) to have international stocks in its portfolio. For the benefit of our readers, please explain the international investment strategy of this scheme.

When we launched our flagship Scheme, Parag Parikh Long Term Equity Fund, in 2013, we aimed to offer a Solution that would enable an investor to participate in equities without being constrained by any self-imposed fetters. That is why we sought the permission to invest across stocks of all sizes, in all sectors and in all permissible geographies.

There are five reasons behind our decision to diversify internationally:

1. Reduction in 'single-country' risk brought about by factors such as war, climate-related upheavals, etc.

2. All stockmarkets do not move in the same direction, all the time.

3. Including a diverse mix of stocks from various countries helps reduce overall portfolio volatility

4. It enables us to gain access to a wider variety of sectors

5. It helps us exploit differences in valuation between a parent company listed overseas, and its Indian subsidiary.

Parag Parikh Long Term Equity Fund is not only one of the best performing funds in the last 5 years, it is also one of the most consistent performers across different market conditions. What are the elements of your investment strategy that you think contributed to your scheme outperforming its peers, including other schemes which also follow the value investment style?

The global and sectoral diversification undertaken by us, has certainly helped.

Apart from this, we have not flinched from taking cash calls (via Arbitrage positions) whenever the situation so warranted. This has helped us conserve our gunpowder without compromising on the stipulation of '65% Indian equities' in the portfolio.

Since inception, we have taken care to avoid huge drawdowns, as we are aware that it gets increasingly difficult to claw back from such setbacks.

Also, one intangible factor could also be the fact that most of us within the Fund have invested our own money into this Scheme. This places added responsibility on us to exercise great caution while taking decisions.

You launched an ELSS, Parag Parikh Tax Saver Fund a couple of months back. Please describe salient features of this fund.

The Scheme was launched in deference to demands that we offer a scheme mirroring our flagship, along with income tax benefits u/s 80C.

Consistent with this, we have not deviated much from our existing method of Fund Management.

The only two restrictions mandated by Regulation are : 1. No international diversification. 2. No Arbitrage related positions

The last 18 to 20 months have been difficult for equity mutual fund investors, especially those who started their mutual fund investments in 2016 – 17 or later. What is your general advice (from the point of view of Indian equity as an asset class) to such investors or new investors who want to invest in the mutual funds?

There is nothing new in what I propose to say...Unfortunately it is often forgotten amidst the daily din.

Despite the adrenaline-infused image that stockmarkets enjoy, equities are not designed to provide speedy returns.

They are the best way to participate in businesses, without undergoing the difficulties of running one. Business people often think in terms of decades and not merely months. Hence, a retail investor must only opt for equities if he / she can remain invested for a long time and be willing to face the same business cycles faced by any Promoter.

In case you press me for a number, I would say...remain invested for at least five years. However, this is only a rough-and-ready measure.

Also, given the complexities of involved in choosing stocks and managing a portfolio, investing a fixed sum in mutual funds every month is recommended.

Decisions like how much to invest, which Scheme to choose etc. are best taken in conjunction with your Financial Advisor.

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully