“Given our long holding periods, it is not worthwhile to get excited about a
or an moving up in a short span of time or to get depressed about an ITC or Bajaj Holdings not going up (though of late even those have started going up),” wrote Thakkar.
PPFAS Mutual Fund runs its flagship PPFAS Flexicap Fund, which is widely popular among investors seeking long-term capital appreciation. Recently the scheme has attracted a lot of investors thanks to its superior returns and word-of-mouth publicity.
The fund prides itself in holding stocks for many years. Apart from the above mentioned names, it has also invested in HCL Tech, Facebook, Alphabet, Amazon, Microsoft, Hero Moto, ICICI Bank, Axis Bank and Persistent Systems, among others.
Some of these names have rallied rapidly recently. For example, IEX has surged over 63 per cent in the past three months. On the other hand, ITC continues to struggle despite most market commentators agreeing on its fundamentals.
Thakkar said equity investment in his funds are more like a Test match than a Twenty20 tournament. Rather than hitting the ball out of the park every time, he would rather take ones and twos to keep the scoreboard running.
“The current environment is such that valuations are clearly elevated in a lot of companies and sectors. Also, trailing returns are looking exceedingly good. To use a cricket analogy again, the run rate so far (trailing returns) is exceedingly good,” he said.
“To win the match (reach financial goals) ones and twos and an occasional boundary will do the job and sixes are not really required. Also the best bowlers of the opposite side have started to bowl (high valuations). At such a time, it is important to conserve the wickets (capital and gains so far) rather than to hit out at every ball and try to get a six,” he said.
The veteran fund manager said underperformance over the benchmark for some period is guaranteed. He highlighted that no strategy can beat the benchmark index all of the time. An S&P analysis showed over a five-year period ending in June 2021, four out of every five largecap schemes failed to even match their benchmarks.
“There are times and sometimes long stretches of time where the performance of an actively managed portfolio lags that of the benchmark. In our case this is usually, but not always, seen in bull markets where the market keeps scoring via sixes and we take singles,” Thakkar said.
PPFAS Flexicap Fund has given 62 per cent return in the last one year. Nifty 500 TRI in the same period has delivered about 60 per cent. In the 5-year period, the fund return stands at 23 per cent against 17 per cent for the benchmark.
Thakkar also advised investors to not be worried about losses or underperformance as “there are no certainties” in equity investing. “There will be some businesses (companies) which do not do as was expected of them and may lose money either in terms of actual loss or in terms of opportunity cost. These cannot be completely avoided. One can only try to minimise these,” he said.
He gave an example of Mahindra Holidays, which he bought but did not perform according to expectations.
Don’t invest abroad for high returns
Thakkar in the letter said his fund invests in international stocks to avail of opportunities that are otherwise unavailable in India and reduce the portfolio volatility, and not gain higher returns.
“There is nothing automatic about getting higher returns by buying international stocks. This should not be a driving factor,” he argued. He said assuming FAANG stocks will always outperform is also not necessarily true for all times.
“International investing should be seen only from the point of view of increasing diversification and the opportunity set and not to predict as to which market or which sector will do better than the other,” he wrote.
Size of fund not a worry
PPFAS has long prided itself in managing a relatively small fund, or in Thakkar’s words being “rounding error” for the mutual fund industry. Smaller funds are usually more efficient, the experience of fund managers says. But now that its assets under management have inflated to 16,000 crore, some are raising questions that if it has become too big to manage?
Thakkar in his letter to unitholders tried to assuage investors that that is not the case.
“There may be questions about the size of our fund and the flexibility we have in investments. Surely we have grown. However I would say that the reports of our AUM growth are greatly exaggerated. Just for context, the AUM of our Flexicap Fund over eight and a half years is more or less equal to what some of the NFOs are garnering these days,” he said.