Rajeev Thakkar, CIO & Director, PPFAS Mutual Fund talks about the
benefits of managing a single fund, the role of luck in investing and more with
Cafemutual.
Do you think the momentum in the market
will continue going ahead? What could derail it?
The day to day events are uncertain to predict.
One big positive is government’s focus on economic growth. It is easing the restrictions of doing business in India. The government’s ability to kick start projects and clear key bills will be something to watch out for.
Ultimately, stock prices are slave to corporate earnings. Statements from political leaders can move markets for 10-15 days but you can’t have a situation where corporate earnings are not improving and stock prices are moving up. Stock prices reflect corporate earnings. One of the challenges for companies would be to improve their earnings even if there are global headwinds.
What is your view on infrastructure sector?
It is a capital intensive sector. People don’t like to pay the fair user charge - be it for electricity, toll or transport. The projects are affected due to populist measures. We would wait till all projects are executed and their gestation period is over. We’ll look at buying companies which are generating revenues. In our portfolio we only have one infra stock which is Noida Toll Bridge. This company has paid most of its debt and is giving cash back to shareholders.
Which sectors do you think will play out well in the next three to five years?
We like the financial services sector. Within this, we are bullish on private sector banks. This is one of the sectors where license raj still prevails. People can start any company in any sector. However, it is not easy to start a bank.
Apart from banks, the consumption theme looks exciting but the valuations are expensive. One has to be selective in this space. So we are waiting for the right opportunity.
How is PPFAS Long Term Value Fund different from its peers?
We buy quality businesses at a discount rather than buying bad companies with very low PE and PB value. We strictly follow the principles of value investing which are advocated by Warren Buffet and Charlie Munger.
Why are you offering an international exposure in your fund?
There is negative correlation between different markets. For instance, from 1993-2002 Indian markets did not perform. There was no return from US markets from 2002-2010. Different markets give opportunities at different time periods. The international exposure reduces volatility in the portfolio.
Even Indian companies are linked to global economy. If you are buying Tata Motors you are also investing in Jaguar. Similarly, if you are buying Tata Steel you are also buying Corus. There are many examples like this. Sometimes the country of listing may not truly represent where the revenue is coming from. For instance, a large chunk of Suzuki’s revenues, which is listed in Japan, comes from its Indian operations.
Some of the companies which are listed overseas are not available in India. For instance, you don’t have too many upstream energy companies (Exxon Mobil, BP) in India. We don’t have Apple, Google or Microsoft in India. In the pharmaceutical sector we only have generic companies. You don’t have innovative companies in the pharmaceutical space in India.
We are aware of the fact that there is a currency risk. We are hedging currency risk to the extent of 90%.
Are you looking to launch any new scheme in the equity and debt space?
The existing scheme has all the flexibility to take advantage of various opportunities present in the market.
We can come out with a pension or tax saving fund. We don’t have a huge conglomerate backing us to launch a debt fund. For instance, some fund houses could fall back on their sponsors during the 2008 liquidity crisis. Also, as of now we don’t have a unique idea or theme to launch a debt fund.
What according to you are the benefits of managing a single fund?
From an investor’s perspective, it is easier for them in terms of selecting a fund. They don’t have to make a choice between 10-12 schemes. If an investor is able to choose the right fund for himself then he/she can also invest in direct equity. When you have one fund, it is easy for investors to understand your fund. We have invested our own money in our fund which also lends confidence to our investors.
From a fund management perspective, it brings discipline and focus. If you are managing 15 funds you have to make sure that each fund is different and allot time accordingly. Since we manage only one fund all our time is devoted to managing one fund.
To what extent does institutionalizing fund management help?
It involves moving to a process driven approach. There can be irrational periods in the market when what you are doing might not be working in your favour. As long as the process is right, over a period of time it does help, irrespective of the luck factor. At the same time you can’t eliminate the role of luck completely. If you were a fund manager in Japan and the market does nothing for 25 years then it is difficult to generate returns. A conducive business environment is essential to generate returns. The experience of a fund manager is also important. Fund management is not a pure science and the processes are ultimately followed by fund managers. There is always an element of human judgment in fund management.
Do you think Indian markets will continue to offer opportunities for fund manages to outperform in future?
The proportion of assets managed by mutual funds is still small. Mutual funds would have unperformed their benchmarks if we were the only category of investor. Mutual funds are able to outperform because there are different segments of investors in the market – FIIs, insurance and retail. As the size of the mutual fund industry grows it would be difficult for mutual funds to outperform.
What are the qualities that you feel a good fund manager should have?
A fund manager should not get carried away with market hype. He/she should be able to withstand volatility. The stock prices do not necessarily move according to your prediction. Thus, one should have the conviction to stay the course.
How important is the role of luck in investing?
Luck can help you temporarily. Had you bought technology stocks in 1996-97 and suddenly the sector booms, then you are a hero in the market in 2000. It is not possible to build a long track record spanning different market cycles purely on the basis of luck.
Your favorite book and why you would recommend it to others?
I have gained immensely by reading the letters written by Warren Buffet to Berkshire Hathway shareholders. Most books on investments are heavy reading and tend to be quite academic. The letters of Warren Buffet are filled with wisdom, humor and anecdotes.
