- A diversified equity fund
- Can invest up to 35% of assets in overseas stocks
- Differentiated strategy
- Route to tax-efficient investment in international markets
- Low volatility and portfolio churn
- Investors with a minimum 5-year horizon looking for portfolio diversification
When we reviewed Parag Parikh Long Term Value last year, the fund had just crossed the 3-year milestone. In our review for the quarter ending June 2017, we included the fund in our Select list. This diversified equity fund is set apart from its peers, in terms of both where it can invest and how it invests. What makes this fund different and whom does it suit?
Parag Parikh Long Term Value (Parag Parikh LTV) invests in stocks across the market capitalisation range. It can invest up to 35% of the portfolio in overseas stocks. It can push up to 35% of the portfolio into debt securities and cash when it does not find investment opportunities. Diversified funds do not usually move beyond 10% in cash. Finally, it can also use arbitrage to hedge risk if required.
In its stock picks, the fund follows a value-rooted and entirely bottom-up approach and takes very long-term calls. It does not take sector calls and go overweight or underweight on sectors. Therefore, though its benchmark is the Nifty 500, its sector weights will be vastly different. This style of investing comes from the house’s PMS (portfolio management services) background.
The fund’s stock-specific approach reflects clearly in its portfolio. It holds several offbeat stocks such as Mahindra Holidays and Gujarat Gas. It unearthed good performers Zydus Wellness and ICRA early on. It is one of the few funds still holding Zydus Wellness, a relatively cheaper consumer play. This long-term value approach also means that several of its picks can take a long time to pay off. For example, Indraprastha Gas formed a part of the portfolio back in 2013, but the stock has truly delivered only from 2016 onwards. The same holds true in the case of Maharashtra Scooters.
On the international side, the fund’s value approach holds. Value is not necessarily ‘cheap’ stocks, but where it finds strong growth for lower valuations than a similar stock in domestic markets. Examples here would be those such as Nestle (FMCG), UPS (logistics), or Anheuser-Busch (alcohol and beverages). In software, it has companies such as Alphabet, Apple, and IBM that are market changers and leaders. These technology stocks not only have a strong and clear growth trajectory but also unique, as similar plays are not available in the Indian market. Indian software companies have only just begun to align their businesses with the changing technology world.
With a compact AUM of Rs 786 crore, Parag Parikh LTV holds a concentrated portfolio of 25-30 stocks. But the concentration can work to its disadvantage too. An example here is its holding in Noida Toll Bridge. Regulatory action last year robbed that company of its primary revenue stream resulting in a severe fall in stock price, dragging down fund returns. The fund has since exited the stock. Internationally, stocks such as Standard Chartered corrected in 2016, again affecting returns.
|% of net assets|
|Bajaj Holdings & Investment||6.5%|
|Mahindra Holidays & Resorts||4.3%|
|United Parcel Services*||3.6%|
Its strategy sees its portfolio churn at 10%, far below peers. It exits or pares down holding in stocks where prices have rallied or have stretched valuations or where the businesses have not scaled up according to expectations, such as Intellect Design Arena, Selan Exploration, ICRA, MT Educare.
The long-term strategy, the low portfolio churn, the value-based approach all result in Parag Parikh LTV underperforming its peers from time to time. In the 1-year and 3-year periods, its returns are slightly lagging the category average of 20% and 15%. The fund has increased cash and arbitrage exposure in past few months to 17% in June, which has also weighed on returns. The fund fares well against its benchmark, though. 1-year returns rolled daily since inception has the fund besting the Nifty 500 index a good 70% of the time.
ICICI Prudential Indo Asia Equity and Birla Sun Life International Equity – Plan B are two funds that also invest partly in international securities, though Parag Parikh LTV has maintained a much higher international share. Parag Parikh LTV’s Sharpe ratio, which measures returns for risk taken, is much better than these two funds and the category average. The ratio is almost equal to top performer Kotak Select Focus. The fund’s volatility too is well below the average for diversified funds. While there has been no prolonged market correction since 2013, the brief spurts of correction in 2015 and 2016 saw the fund contain losses much better than the peer average.
Parag Parikh LTV cannot be part of your core portfolio for two reasons: One, it does not yet have enough of a record to judge the effectiveness of its strategy truly. Two, among all markets, ours is the one best positioned for a long-term rally and the fund’s lower holding in India could cap returns compared with regular equity funds.
The fund is suitable if you are looking for diversification in your mutual fund holdings. Given its portfolio and strategy, overlap with other funds will be low. It is tax-efficient for those who want international exposure. Pure international funds are taxed like debt funds.
Note that you won’t benefit from currency gains in this fund, since it hedges most of the currency exposure. The fund requires a holding period of at least 5 to 7 years as its stock calls play out only over time, and an ability to stay put through periods of underperformance.
Rajeev Thakkar, Raj Mehta, and Raunak Onkar are the fund’s equity, debt, and foreign securities’ managers, respectively.
FundsIndia’s Research team has, to the best of its ability, taken into account various factors – both quantitative measures and qualitative assessments, in an unbiased manner, while choosing the fund(s) mentioned above. However, they carry unknown risks and uncertainties linked to broad markets, as well as analysts’ expectations about future events. They should not, therefore, be the sole basis for investment decisions. To know how to read our weekly fund reviews, please click here.