The past few months have been surreal for investors — with the market first crashing in the wake of the coronavirus and then staging a spectacular recovery from its March lows to recoup most of its losses.

Still, the market is down from where it was a year ago, and so are most equity funds.

But even in these difficult and highly volatile times, a few funds have managed to hold their own — containing losses during the fall and participating well in the subsequent rally, thus keeping their heads above water.

Among the best performers in this select set is Parag Parikh Long Term Equity.

The multi-cap fund is a top performer in its category with annualised returns of 12 per cent over the past year, 10-11 per cent over three and five years, and about 16 per cent over seven years. This is far better than the performance of its benchmark (Nifty 500 TRI) and the multi-cap fund category that have posted negative returns of 6-7 per cent over the past year, and lag the fund significantly even over longer periods.

The fund’s ability to contain downsides well was reflected during the weak market in 2018 and also during the recent March quarter when its losses were lower than that of the benchmark and the category average.

Besides, the scheme has done much better during upsides such as in 2019 and the recent June quarter. This combination of low downside and high upside has seen Parag Parikh Long Term Equity race ahead of its benchmark and the category average.

 

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Global diversification

This good show has been aided by a few factors. One, the fund’s unique selling proposition — deploying about a third of its corpus in foreign stocks — has paid off well, with US tech stocks, in particular, having a strong run.

The scheme’s foreign holdings are mostly tech stocks — Amazon, Alphabet (Google parent), Facebook and Microsoft (together about 25 per cent of the portfolio as of June 30) — plus an auto stock, Suzuki Motor Corp (about 4 per cent).

The foreign stocks portion of the fund’s portfolio gives it global diversification benefits and access to niche stocks not available in India.

The scheme hedges most of its foreign currency risk exposure.

Next, the fund’s value investment strategy along with a bottom-up investing approach — focussing on high-quality stocks rather than on macros — has held it in good stead in the long run, despite underperformance sometimes in the near -term. The fund is flexible in taking sizeable cash positions if it perceives stocks to be expensive, and also shifts allocation among asset classes and market-caps, based on market conditions.

The scheme’s cash holdings, debt and arbitrage positions reduced from about 20 per cent of the corpus as of March 2019 to about 11 per cent as of December 2019, and further to 5.6 per cent as of June 2020 — indicating steady deployment of cash to make use of buying opportunities. Domestic stocks account for at least 65 per cent of the corpus; this puts the fund in the category of equity funds and gets investors favourable tax treatment on gains on sale.

Over the past few years, the fund had increased its domestic large-cap exposure to nearly 45 per cent of the corpus while paring exposure to smaller stocks to 20 per cent before the market crash this year. In recent months, exposure to large-caps has been reduced to 42 per cent from 45 per cent, while exposure to smaller stocks has been increased to 24 per cent from 20 per cent, taking advantage of buying opportunities.

Value picks

Across market-caps, the portfolio has high-quality stocks. Prominent names include HDFC Bank, Bajaj Holdings and Investment, Hero MotoCorp, Persistent Systems, ITC, Mphasis, Balkrishna Industries, ICICI Bank and Axis Bank. The scheme runs a compact portfolio with about 20 domestic stocks and about five foreign ones.

Amazon and Alphabet are the largest holdings (8-9 per cent), followed by HDFC Bank and Bajaj Holdings (6-7 per cent). Internet and technology is the largest sector holding, followed by banks.