PPFAS Asset Management

About

Established in 2012, PPFAS Asset Management (PPFAS AMC), is promoted by Parag Parikh Financial Advisory Services Pvt. Ltd. (PPFAS Ltd.), a boutique investment advisory firm incorporated in 1992. PPFAS Ltd. is also amongst India’s earliest SEBI Registered Portfolio Management Service (PMS) providers.

The assets under management (AUM) have grown significantly in the past two years to about USD 2.8 billion as at 31 March 2022.

(INR crore)(USD billion)
Equity AUM21155.122.82
Debt AUM2119.970.28
Total AUM23275.093.10

The key items from the FY21-22 financial statements –

Total Income (INR crores)Total Expense (INR crores)EBIT (INR crores)EBIT MarginNet Profit (INR crores)Total Income (USD millions)Total Expense (USD millions)Net Profit (USD millions)
2021-2289.2334.0255.2162%55.2111.904.547.36

Key staff

Neil Parikh, Chairman & CEO – Neil has experience across wealth management, research, Institutional desk, marketing, operations, broking, key client management to name a few. He started his career as an intern with JM Morgan Stanley in 2003. He has been a part of Parag Parikh Financial Advisory Services Pvt. Ltd. since July 2004 in various capacities. He holds a Masters in Business Administration from IESE Business School, Spain and a BA in Economics from University of North Carolina at Chapel Hill. He is a avid reader and a passionate golfer. He also plays several other sports for recreation.

Rajeev Thakkar, CIO & Director – Rajeev has over two decades experience in various segments including investment banking, corporate finance, securities broking and managing clients’ investments in equities. He started as a research analyst at PPFAS Limited in 2001. He was appointed the fund manager for the flagship scheme of the Portfolio Management Service, titled “Cognito” in 2003. Rajeev is a Chartered Accountant, Cost Accountant and CFA Charterholder.

Raunak Onkar, Head of Research – Raunak started his career at PPFAS as part of his internship during MBA. He holds an MMS (Finance) degree from the University of Mumbai.

Investment Philosophy (for firm)

The website of the AMC does not have any explicitly mentioned Investment framework.

The following has been gleaned from other sources –

  • They  view equity investing as purchasing stakes in businesses, rather than merely investing in pieces of paper.
  • However much they like a company, they avoid overpaying.
  • Prefer purchasing cash generating, low debt businesses
  • Like to partner with Managements who take care of the interests of minority-shareholders.
  • Stay away from periodic fads and fancies in the stock market, whether they be businesses, sectors or themes.

‘WE STRONGLY BELIEVE THAT THE FOLLOWING PRINCIPLES OF VALUE INVESTING WILL HELP US CREATE VALUE FOR OUR UNITHOLDERS.’

The investment process of the AMC considers factors like management quality, industry/sector characteristics, financial leverage and risk, intangible assets, competitive advantage, pricing power and above all attractive valuations.

  1. Shortlist companies – Through quantitative screening, scrutinising public filings etc.
  2. Fundamental Research – Involving the industry, peers, historical financial data, etc.
  3. Valuation Study – Historical and peer valuation is combined with internal estimates of intrinsic value
  4. Portfolio Construction – In line with internal prudential guidelines and Regulatory stipulations.

Investment process

Equities

The research team is structured on sectorial lines. Each analyst covers the allocated sectors and the companies in that sector both in India and outside.

The AMC have a defined coverage universe (around 25 companies). We invest in companies from our coverage universe. We are neither too concentrated nor excessively diversified. We apply quantitative filters based on leverage, return on equity, market cap and so on. We only cover companies which meet our criteria. The AMC are mindful of the valuations we pay for the business.

The investment process for the Long Term Equity Fund (LTEF) and the Tax Saver Fund (TSF) is the same. However there are some differences in the portfolio construct based on the following

The LTEF can invest in foreign stocks up to 35%, the TSF can invest in only Indian stocks

The minimum weightage to Indian stocks is 65% in LTEF. It is 80% in TSF.

Derivatives can be used in LTEF whereas they cannot be used in TSF.

Liquid Fund 

The primary objective of our liquid fund is to have a safe place to park short term funds and to enable Systematic Transfer Plans for our equity funds. The AMC only investing in sovereign debt and overnight money market deployment. They have small exposure to corporate debt and bank the AMC invest largely in sovereign papers. The AMC keeps exposures per corporate issuer small and they do their own credit analysis.

Media

MMI interview with Neil Parikh, June 2022

Yet to summarise

MMI interview with Rajeev Thakkar, June 2022

Yet to summarise

MMI interview with Parag Parikh, July 2014.

Highlights –

Their vision is – ‘If 5 years down the line, if anyone thinks of equity they should be thinking of PPFAS.They believe that in a mutual fund, investors are shareholders and the asset management company is the manager. They talk about their ‘Skin in the game’ herein they all involve themselves have invested around 35crores in the schemes. Value investing is their focus. He stated the investors need to be “Greedy when others are fearful, fearful when others are greedy”. Their competitive advantage is that they ‘walk the talk’.

Then he talks about how they form a scheme – Under one roof they cover Indian stocks, arbitrage, hedge the bets, international stocks and also avail the tax benefits of a equity fund. They  have international stocks to make the portfolio less volatile and maintain geographical balance. Basically no risk of AUM, no marketing, and the RM’s call the clients to explain that the scheme is long term, because he thinks he has built a trust by investing right over these many years.

Then he says – Believe are Entrepreneurs. Investing is like a passion, share the passion and create goodwill. The older you get, the more valuable become for the society.

Then topic goes on to – what makes them stand out?

  • behavioral finance built into investment process
  • companies are filtered using fundamental criteria
  • Ability to walk the talk – “only one right way of investing – Value Investing”
  • Courage to be contrarian. 
  • Competitive Advantage is maintained through employee and management motivation as they have invested in the scheme.

MMI interview with Rajeev Thakkar, June 2014. 

Edited transript –

What is your competitive advantage in idea generation?

We have numerous advantages given the current SEBI restrictions and tax laws we have kept the flexibility in the scheme. If there is an opportunity the mandate must be flexible to take advantage of the opportunity. Our Fund size is another advantage because we can go into a broader number of stocks in comparison to a fund who manages 5000 crs. We don’t compare performance with Q-o-Q or Y-o-Y we see only the larger period for 5 years.

How have you applied behavioral finance in your portfolio?

 We were underperformance in 2000 and 2007 so when the index was up 40% we were up by 5% so there was a huge underperformance because we stayed out of the Dot.com bubble and real estate bubble. Now knowing the mistakes people make helps us to take advantage of the mistakes they make

What is the investment philosophy? Underlying view of the markets?

We are active fund managers and we think markets are inefficient, in most times markets are markets are efficient in short run but they are not efficient all the time. We believe that active managers do have a role to play to add returns.

How do you define value investing?

We are more Buffet kind of approach rather than Benjamin kind of approach so we don’t mind pay a bit more for quality names which is very relevant in India. The reason for that is very little scope for shareholder activism and we are dependent on promoters to deliver value to investors. 

What are the filters you use to choose investments?

Management quality is an important filter we tend to avoid management who are value destroyers, the other is sectorial filter we tend to stay away from very less ROI sectors like airline sector and we try to understand the underlying business as much as possible.

In terms of financial parameters we like to focus on high ROE and low leverage

How do you do research on the investable universe of stocks?

The sell side research is a primary starting point so if we have a positive view of a stock we might look for a negative sell side research report and vise versa to check on our thought process of the stock. But the final research come in house 

How is portfolio construction made, how do you decide how much money to invest in an idea?

We have a broad idea of how many stocks to have in a fund, we can have a portfolio with 3 stocks or 150 stocks but how do we come up with the number stocks to have in a fund. Minimum we must have a 10 stocks ( it’s a SEBI requirement because they have a maximum investment of 10% in a company) now if we have 100 stock investing 1% of the Fund AUM in each stock if any one stock doubles there is not much from a fund’s perspective because fund allocation is very less.

So there have been significant research done in a portfolio construction that 15,20,25 stocks in a portfolio gives adequate diversification and it does not dilute the best ideas. So that the whole thinking behind our 20 stocks in a portfolio

How is research conducted to come to a purchasing decision?

For example let’s look at Axis Bank in the banking space. we have most of the market share in the banking sector held by public sector players. It is a sector where there is licensing, so effectively we have 3 players who are running it as a business HDFC bank, ICICI Bank and Axis Bank and in India when banking is still underpenetrated and when real GDP growth is between 5% and 8%, Inflation is at 5% – 6% overall the money supply grows at 15 – 16% Year on year that is the given growth for the banking space, so its visible that the private banking will grow at 18% plus for many years to come is visible. So if a banking stock is available at 2 times book value it is a no brainer so we can go and buy them like we have done with Axis bank. But we don’t have an EPS projection and Cash flow projection for next 5 -10 years, we look at the underlying business and buy it if the valuations are attractive.

Do you have a restrictions on portfolio construction in terms of large cap, mid cap?

We have the SEBI rule of Maximum 10% fund allocation in a stock and additionally we wouldn’t be in a sector more than 20% of the portfolio.

Our benchmark is CNX 500 we have chosen the benchmark because we have 75% of the CNX 500 is overlapped with nifty which is a widely tracked index and it can also be considered as a mid-cap representation, now our scheme is a flexi cap scheme and there is no restriction on the large cap holding or mid cap holding, since we find more value in small cap we are invested in more in small cap if we find the large cap more attractive we will invest more in large cap in future. Since our AUM size is also high liquidity is not a significant risk in portfolio allocation.

What are the other factors is considered as risk?

We don’t consider volatility as a risk, we consider permanent loss of capital as risk. We have geographical diversification and we invest in global stocks after hedging currency exposure which also gives an additional yield because rupee trades at a discount in the forward and futures markets. In dividend yield we get 3% in dollar terms and 5-6% hedging yield and we get a bond like returns of 8-9% yield and capital appreciation is above that on international portfolios. We also take opportunistically take advantage of special situations for eg. We have united sprites there is an open offer for the shares and we tender all our holdings for a 5-7% return for 1 month holding

What is the main driver for your out-performance?

In term of attribution analysis, becomes difficult to do attribution analysis when the companies we hold represent the entire sector.

Analyst questions

Which specific ratios, and what levels, do you use to filter?

Why do you continue to use the ‘value’ style label when you admit that you follow a more ‘GARP’ style?

Prepared by – Partha, May 2021,

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