Meet The Manager. “Our attempt is to get five-star food at Udipi prices”

With a tortoise for its logo, a single equity scheme and a go-anywhere mandate that allows the fund to invest in foreign stocks, Parag Parikh Financial Advisory Services’ (PPFAS) mutual fund has taken the road less travelled. The fund’s CIO Rajeev Thakkar fields questions about the fund’s offbeat ideas.

Though the past year has been good for value investing, the Long Term Value Fund’s returns have been lower than other funds with a value label. Why is this?

The structure of our fund is different, with 35 per cent invested in overseas stocks. The overseas component does two things. One, it rounds off the portfolio in terms of opportunities that are not available in the Indian market. Take oil; we don’t have an Indian company that can participate in crude oil price upside or downside, due to subsidies. Two, the overseas portion lends stability to the portfolio.

India-specific events like a terrorist attack or a bad monsoon, for example, will have a muted impact on our returns. In equities, what people fear the most is a loss-making or flat market. An overseas component helps you ride out such periods. But even with the overseas component, we have done better than our benchmark.

Are you also looking to offer currency diversification for Indian investors?

No. On the foreign component of our portfolio, we usually hedge over 90 per cent of the exchange rate risk. Indian interest rates are far higher than overseas rates. So, the Indian rupee usually trades at a discount in the forward market. When we hedge, we get a 7-8 per cent income from this differential. We also get a 2-3 per cent dividend yield from the overseas stock.

We are benchmarked to the Indian CNX 500 and our investors look at returns in rupees.

Google is a top holding in your portfolio. Is it a value stock? Would you say that Google is a better buy than any Indian stock?

People define ‘value’ differently. The Benjamin Graham school looks at low price-to-book value and low price-earnings.

The Warren Buffett school buys quality companies at a reasonable price. We follow the latter.

Our attempt is to get five-star food at Udipi prices. Charlie Munger recently said that Google was the company with the widest moat he had ever seen. If you compare Google’s market cap (minus cash) to its earnings, it trades at a PE of 25 times. Google gets 35-40 per cent of all the global spends on digital advertising. The biggest advantage anyone can have in internet advertising is precise targeting of ads. Now Google has a browser which tracks all your searches. They are the largest email service provider and know your mail history.

If you have an Android device, they also know where you live and work. They may even know where you go on a holiday! So this whole ecosystem that Google owns — Android, Chrome, maps, email — is very difficult to dislodge. The other property which is not sufficiently appreciated is YouTube. YouTube has the potential to replace most non-live television programming.

As we expect more smartphones, better 3G penetration and broadband expansion, Google looks hugely attractive at 25 times earnings. You certainly don’t have any equivalent play in India.

Given the opportunities, why is it that so few equity funds are investing in overseas stocks?

In India, there is a limit of $300 million (₹1,800 crore) to the foreign exposure that an Asset Management Company can take across equity schemes managed by it. Mainstream funds with a very large asset size may soon hit that ceiling if they try and invest. Our fund is currently at ₹500 crore. Until our fund grows to a ₹6,000-crore size, we can employ this strategy.

There are a number of mid- and small-cap stocks in your top holdings. Is that a conscious choice?

No. We do not want to be constrained by any specific market-cap bias. We tend to go entirely by a business and its prospects. But if you take our overseas stocks into account, you will find our market cap bias isn’t really skewed towards smaller stocks. Even in India we own ICICI Bank, Axis Bank and other large-cap holdings. Most fund houses in India launch multiple schemes for mid-cap stocks, small-cap stocks, infrastructure stocks and so on. We did not want to do that. We have one scheme which can invest in any of those opportunities.

In India, you repeatedly find this pattern where FIIs buy at the bottom of the market and retail investors come in close to the top. How will retail investors ever make money if this is the case?

In FII buying, it is difficult to segregate cause and effect. It is hard to say if FIIs get in at the right time or if their buying simply causes stock prices to spike, because of impact costs. Actually, I think the only true contrarian in the Indian market is someone like LIC. They usually pick up stocks at the real market lows. And they have money flowing in, in all market conditions and are able to do this. It is very strange that people will buy a 30-year insurance policy and forget about it. But the moment they buy equity funds or stocks they will immediately enter them into Yahoo Finance or Moneycontrol and begin to track it every day. Then, they worry about the daily swings in the Sensex.