A capital Idea
The much-awaited new equity fund from the stables of value-investing guru Parag Parikh is now on offer. THE PPFAS Long Term Value fund, offered by Parag Parikh Financial Advisory Services (PPFAS), AMC opened for subscription on May 13.
For those new to the financial world, PPFAS is a well-established portfolio management services firm that has been successfully running long-term equity investment portfolios since 1996. The firm’s flagship portfolio management services (PMS) fund delivered 14% annually (as of March 2013) in the last five years, as against the Sensex return of 5% a year.
With individual ticket size as low as Rs 5 lakh, the PMS had a healthy retail investor client base as well. But a little over a year ago, SEBI changed the minimum investment level in the PMS space to Rs 25 lakh. Hence, the current move by PPFAS to start an equity mutual fund may be viewed as a way to channelise its PMS clients with low ticket size into mutual funds.
PPFAS Long Term Value Fund will seek to generate long-term capital appreciation through principles of value investing. In other words, this will be a diversified equity fund with a value strategy. The fund will invest 65-100% in domestic equities and has the mandate to invest up to 35% in debt instruments. It can also invest up to 35% in foreign equities.
That means, for capital gains tax purpose it will qualify as a regular equity fund (as domestic equity exposure will be not less than 65%). The fund will also use derivative strategies to hedge, wherever appropriate.
While that may sound like a regular fund, PPFAS Long Term Value has made some bold statements:
– The fund clearly states that investors should have an at least 5-year investment time frame
– It will have only a growth option and not have a dividend option as it believes in long-term growth
– The fund house states that this will probably be the only fund it runs in the foreseeable future
– The fund will not charge any exit load
– The senior management team of the fund house will invest a sizeable portion in the fund and also encourage employees to invest. Monthly disclosures of the same will be made.
Value investing is not entirely a new proposition in the fund universe. That said, not too many funds stick to this style for fear of periods of underperformance (that value strategy is prone to) and pressure to remain in the toppers’ chart. Funds such as ICICI Pru Discovery, Templeton India Equity Income and a few dividend yield funds have managed reasonably well, albeit taking some leeway to move from the core strategy.
PPFAS Long Term Value will seek to buy securities that are trading at a discount to their intrinsic value. Simply puts they will look for stocks that are mispriced. Typically, stocks could be mispriced for various reasons: companies/sectors may be out of fortune but may provide reasons to believe that there will an impending turnaround or the value of certain assets in the company may not be understood or spotted. Typically such businesses may seem either uninteresting or going through phases of ‘nothingness’.
Value investing involves spotting such opportunities using quantitative as well as qualitative research. Valuation metrics such as low price to earnings ratio, low price to book value or price to cash flow, high dividend yield are commonly used. In doing so, valuations may be compared with peers or with the company’s own intrinsic worth.
Typically value investing may entail you to take subdued performance for extended periods followed by a spurt. On the positive side, the downside is often contained as the stocks selected are already well below the value at which they ought to trade.
If PPFAS follows the strategy it adopted in its PMS space, you can expect it to have reasonably compact portfolio of focused bets sufficiently cushioned to contain falls. Its idea of investing in foreign securities is also a good one. Funds such as Templeton India Equity Income have proved that there are a number of value propositions (especially based on dividend yield) available outside the Indian markets.
“It may seem difficult but it is not so. Take the case of a young person starting his career at the age of 25. Assuming he retires at 65, he has 40 years where he can save and invest. Indians would invest in long-term investments like Public Provident Fund (PPF), life insurance policies and gold over many years. But when it comes to equities they think short term. So it is not that people don’t believe in the long-term investing but problem is the mindset towards equities.”
(excerpts from ‘Letter from Parag Parikh’)
For those of you already familiar with the Parag Parekh way of investing, the fund’s philosophy may not come as a surprise. For the others, here’s a list from the fund house that will tell you whether this fund will suit you:Checklist
PPFAS Long Term Value will be managed by Rajeev Thakkar, who has vast experience in managing the sponsor’s PMS product. The NFO will close on May 21.
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