Rajeev Thakkar, CIO at PPFAS Mutual Fund, manages PPFAS Long Term Equity, which recently completed 5 years. He shares his investing perspectives and discusses his fund with Ravi Samalad of Morningstar.
Explain what sort of an investor you are.
There are two kinds of players in the market.
Investors, and those trying to predict price movements –traders and momentum chasers.
We are investors who look at business valuation and management. Not at technical charts, analyst expectations, macro-driven and event-driven strategies.
When we look at business quality, it is how much a business is able to earn on a sustainable basis for its shareholders, which is reflected by return on equity. If a company is able to generate Rs 25 on a capital of Rs 100 then it is good. If a company is returning 5% ROE, shareholders would be better off putting money in bank fixed deposit.
We also look at other ratios like debt/equity ratio which gives us an indication of free cash flow. After these checks, we buy the company at a reasonable price.
We look at trustworthiness of the promoter and management quality, whether they are minority shareholder friendly. We stay away from group or companies which have shown signs of accounting manipulation.
Have there been instances where you have exited such companies?
Not on account of management quality. We are careful while entering itself, but if such a thing comes to light later on, we would exit. For instance, banks like ICICI Bank and Axis Bank are facing some headwinds. They are a part of our portfolio. But the exposure is minimal. Our largest position in banking is HDFC Bank (7.33%). Our stance is that the regulators are doing their jobs. They will come to a conclusion.
One distinction between promoter-driven and dispersed shareholder companies is if any wrongdoing is found in professionally run companies, the CEO can be replaced. For instance, the controversy in NSE resulted in a change in management. So it is fine from shareholders perspective. If the promoter is holding more than 50% in the company, you can’t do anything even if something wrong is proven.
Your fund is holding 23% in cash. This helps in protecting the downside but you can also miss out on a rally.
The current cash position is the maximum that we have had so far. Given the valuations prevailing we were about 23% in cash/equivalents/arbitrage as on May end. The cash holding a year back was about 17%.
The cash call is not active. We don’t take a market view and adjust cash accordingly. If we were to know that market would definitely fall, we would go 100% into cash. In such a case, why hold equity? So its not market call.
It is just that we want a certain number of stocks for diversification. Studies have shown that most benefits of diversification come from the first 12-14 stocks. Up to 20-25 stocks is also fine. Beyond 25 stocks, your best ideas get diluted and diversification benefit goes away. Excluding arbitrage, we currently hold 25 stocks.
When we complete our portfolio and don’t find investment opportunities then cash remains as residual. The cash position depends on buying opportunities in the market.
PPFAS LTEF can invest in Indian and overseas companies, money market instruments, corporate bonds, government bonds as well as arbitrage positions. In theory, 35% can be in money market and bonds. If we use arbitrage, the equity exposure can even go as low as 15-20%.
Are you finding buying opportunities in the current market?
We are always on the lookout for buying opportunities. One of the recent purchases was Suzuki Motor Corporation ADRs as a proxy to Maruti Suzuki in India.
Given our bottom-up stock picking approach, we look at individual stocks rather than sectors or themes. However, given the widespread pessimism associated with Indian IT and pharma companies, we have added to our holdings in that space in the last 12 months.
That explains you being overweight in IT.
We have two kinds of technology stocks. One kind is not related to IT services. For instance, Alphabet and Facebook are very different companies. They are advertising and media businesses rather than pure play IT. They have their own dynamics.
One good thing about the IT space is that traditionally governance has been strong in terms of transparency and disclosures. The only concern investors had was on capital allocation and whether the industry is getting disrupted. Capital allocation is improving. IT services firms are conscious that they can’t sit on cash. And the fear that all services will go away due to VISA difficulties are overblown. Currency is also helping the sector.
Your fund holds 5% in Facebook. What is your evaluation of the company with all the controversies surrounding it?
There could be fines coming their way but that does not take away the fact that Facebook continues to be a very dominant way of reaching consumers. Facebook also owns Instagram and WhatsApp. All put together, it’s probably the best way of reaching maximum people globally, except for China. In most places of the globe, Facebook is very popular.
Media is getting fragmented. Earlier, there were one or two dominant newspapers, radio and television channels in the city. If you advertised on those, you could reach all consumers. Today, the challenge is a matter of plenty; many TV channels and of course, the internet. You have Google and Facebook. The advantage that internet/social media companies have is that you can have targeted advertising. In a newspaper, the same advertisement is seen by everybody. In internet advertising, all the factors (age, city, time, location, etc.) can be taken into account while advertising. It is focused and targeted. For now, it looks promising.
Is that the reason you are not holding any traditional media companies in your portfolio?
Globally, newspapers and magazines have had it very tough in terms of dwindling circulation and revenues. In India, that has not been the case so far. In fact, regional press is growing its revenues. But the threat of disruption is there.
In the U.S. this year, internet will cross television for the first time ever, in terms of hours spent on the medium. Even for traditional channels like radio, the app and internet-based music is a threat. For cable television, on demand mediums such as Netflix and Prime Video are threats. Essentially, all of these are on demand versus traditional TV where you have to watch when they are broadcasting or put it on recording. The younger generation seems to be moving away from linear TV in a big way.
Any internet/technology companies that you like in India?
A few. For example, InfoEdge which owns and has stake in Naukri.com, 99acres.com, Jeevansaathi.com, Shiksha.com, Zomato, Policybazaar and so on. Unfortunately, some of the companies (MakeMyTrip and Yatra) operating in India are listed overseas.
Other companies like Flipkart, Olacabs and Uber are unlisted. So we don’t have too many options. We hold Google and Facebook. These companies are benefitting from the internet growth worldwide, including India.
