Why PPFAS is unfazed by foreign investment limits

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Where do you see opportunities to invest currently?

In the current market, interest rates hikes have been factored in. The inflation narrative has been toned down a bit now as most commodity prices except that of crude have come down across the globe. Some of the supply side issues are also easing. Now, the only worry is the demand destruction that will happen in some sectors. So, from a longer-term view, the consumer space remains a good place to invest in if you find something good at right valuations. You should consider them because they have a stable cash flow generation capacity, the businesses are simpler to understand and because of the brand franchises, they will retain some of their market share. Secondly, technology services, because India has been one of the largest beneficiaries of that. Technology services also has a tailwind linked to the US growth rate. So, you might find cyclical downtrend here and there, but if you have a long enough time horizon, you can ride out the volatility and the tailwind can also be captured.

Private sector banks have been gaining market share for a long period of time from the PSU banks. The industry also keeps growing and so does the overall dividend growth. Some of the larger private sector banks have decent balance sheet quality. So, that will also protect some of the credit growth for these banks. So, opportunities are available for them as long as nothing major happens in their lending book.

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PPFAS MF is a firm believer in value investing. Do you expect value to outperform in the coming years?

Compared to the last 6-8 months, valuations have corrected or moderated and we are finding decent ideas to deploy our incremental investments across the market. Companies that require external capital to fund growth have been hit significantly higher than some other stable businesses, which can generate their own cash flow and grow. This also reflects in our overall cash position, which is 5- 6% now compared to 9-10% a couple of months back. So, this time, we are seeing stable businesses remaining stable.

We don’t distinguish between value and growth too much because value is only useful if there is a growth component to it. So, when you see value from a traditional definition, it involves companies that don’t have an incremental growth trajectory, and they’re just using their same assets to generate additional earnings. For example, there are commodity business that do not have an incremental upside to what they’re selling, it’s just that when the market gives a commodity a certain higher value, they generate a higher operating leverage from that. But when we look at value investing as a concept, we see growth as a good component to it. So, that is our hunting ground.The businesses should be cheap, should be growing, should have good management quality and be a good business to be in.

Are small and mid-cap stocks looking more attractive than large caps now?

Many are but again it depends on the business. Some of them are really commodity businesses and these have crashed because commodities have crashed. You need to separate these businesses from a sustainable cash flow and commodity valuations point of view.

PPFAS MF’s Flexi Cap Fund has 20 -30% exposure to international stocks. These are the big US tech firms. Will you look beyond these companies?

This is a recent phenomenon where we are more skewed towards novel tech businesses. In the past, since the inception of the scheme, we have had a variety of companies. We used to own the (stocks of) Nestle parent company, 3M parent company, Anheuser-Busch, IBM, British American Tobacco and Standard Chartered Bank. It’s just that in the recent past, these companies are more attractive from a valuation and growth point of view.

Actually, if you see the portfolio, we have Alphabet, Amazon, Microsoft, and Meta. These companies have strong balance sheets. So, the only risk that remains for these companies is regulatory risk. So, if the valuations don’t make sense or there are some other business issues, we will look at other companies too.

Parag Parikh Flexi Cap Fund had to halt fresh inflows in February. While this was re-started in March, you will be unable to deploy additional funds into international stocks. Will this dilute the returns of this fund?

We stopped international investing because of (market regulator) Sebi’s overall foreign investments limit of $7 billion for the MF (mutual fund) industry. We shut the scheme, assuming the limit would be revised in the next couple of weeks. But then we realized that it may not happen immediately and valuations were correcting in the domestic market.

A large part of the portfolio is still domestic (at least 65%). So, it really makes sense to invest at least in our own market when it is possible to do so and investors are willing to give us money. So, we reopened the scheme. Now, because incremental flows have not gone to international stocks and stock prices have also been volatile, this has affected the holding of foreign stocks. But the intention is to retain some diversification. So, we have not sold a single foreign company share.

International stock exposure is the USP of your flexi cap fund. Unless the foreign investment limit is raised, won’t this affect your returns?

So, returns and USP may not go hand-in-hand. Returns depend on which businesses we choose to invest in, either domestic or international. We have seen in the past that both domestic and international portions have contributed to returns at different points in time.

As long as we are not playing with fire, in terms of going into deadly valuations and difficult businesses to understand, we are okay. I think returns will follow eventually. We have to follow our basic guidelines of investments and need to have 25 to 30 stocks which will satisfy these criteria to build a portfolio.

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