Volatility makes many to hate the idea of investing in stocks. But what if there is a scheme that employs a two-way approach to contain volatility – by employing time-tested value investing principles to construct a multicap portfolio and by bringing in geographical diversification by investing in stocks listed overseas. The scheme that aspires to do this is Parag Parikh Long Term Equity Fund (PLTEF).
The scheme was launched in May 2013 and the assets under management stand at Rs 1,338 crore by end of September 2018. The scheme aims to generate long-term capital growth from an actively managed portfolio primarily of equity and equity related securities. PLTEF invests minimum 65 percent of the money in Indian stocks and related instruments. The scheme can invest up to 35 percent of the money in overseas securities and Indian debt and money market instruments.
The scheme is managed by Rajeev Thakkar, Raunak Onkar and Raj Mehta. PLTEF is the flagship scheme of the fund house and the only equity focussed fund. The fund house offers Parag Parikh Liquid Fund in addition to this scheme.
The scheme has invested in a concentrated portfolio of around 25 stocks. The stocks are picked up on a bottom-up basis. The fund manager identifies investment opportunities that would deliver over a five-year time frame. “We don’t put much emphasis on the macro environment and the associated factors since they are not predictable and not within anyone’s control. We believe in bottom-up stock picking where the primary criteria for stock selection are management quality, business with some competitive advantage and availability at a reasonable price,” says Rajeev Thakkar, CIO, PPFAS AMC.
‘Internet and technology’, ‘banks’ and ‘auto & auto ancillaries’ are the top three sectors in which the scheme has invested. “Allocation to foreign equities provides reasonable diversification and lowers the volatility of the portfolio returns across cycles. We not only have US companies in our portfolio but also some companies based in other countries like Nestle and Suzuki which have their ADRs listed on the US stock exchanges,” says Thakkar.
The fund has cut its exposure to Indian stocks. Though the total exposure to Indian stocks is maintained above 65 percent, you should not ignore the fact that 20.6 percent of the total assets of the scheme is deployed in arbitrage positions. That leaves investors with a net equity exposure around 45 percent.
For the beginners, arbitrage positions offer returns almost close to money market returns. The fund manager buys shares in the cash market and sells them in the futures market simultaneously. This helps him to capture the price differential without taking risk of market movements. As the futures near expiry, the prices converge and fund manager can reverse the transaction and realise the gains.
The fund manager does not hesitate to opt for arbitrage positions if there are no bargain deals available in the stock market. When the valuations rise, there is a possibility that the allocation to arbitrage goes up. When the valuations fall and there are bargains available in the market, the fund manager can buy stocks and deploy this cash.
Returns as on October 11, 2018 for regular growth option; Source: Moneycontrol
Should you invest now?
The scheme’s portfolio has cut its net exposure to Indian stocks over past two years. Compared to 62 percent in September 2016, it came down to 55 percent in September 2017 and to 45 percent now, in line with rising valuations of quality companies. High cash levels and exposure to overseas stocks have helped the fund to weather recent sharp correction in Indian stocks. If markets remain weak the fund manager may get more investment opportunities in terms of bargain deals in quality stocks.
The scheme being market cap agnostic, the fund manager can pick and choose the best ideas available at any given time. That makes a strong case for investments in this fund.
While explaining the investment strategy of the scheme, Vidya Bala, head of mutual fund research, FundsIndia.com says, “Fund has a strategy of investing some portion in international stocks and this has delivered well in a volatile domestic scenario in 2018. The fund goes behind value wherever it is available.”
Though the numbers look good for now, it is not meant for short-term investors. “The fund can underperform in the short to medium term when the markets see a prolonged rally. However, over the long-term (3 and 5 year periods), it has a highly consistent track record of beating the index and also peers,” adds Vidya Bala.
How to invest?
Investors must take a five-year view on this scheme. The best way to invest could be through a systematic transfer plan or a systematic investment plan. Though the fund has done well over past five years, the investors must be prepared to tolerate short-term underperformance in case there is a sudden rally that overlooks fundamentals.