About
Established in 2012, PPFAS Asset Management (PPFAS AMC), is sponsored by Parag Parikh Financial Advisory Services Pvt. Ltd. (PPFAS Ltd.), a boutique investment advisory firm incorporated in 1992.
According to an AMFI report, the firm has assets under management of INR 24,800 Crores (~ USD 3.10 billion, conversion rate of INR 80) as of March 2023.
The AMC currently has four schemes. They firmly believe in promoting the interests of their employees and investors and, therefore, follow the ‘feet on the street’ approach where all senior management has an invested stake into the Parag Parikh Flexicap Fund.
The parent company, PPFAS Ltd. is amongst India’s earliest SEBI registered portfolio management service (PMS) providers.
The key figures from the financial statements FY 21-22 –
| Year | Total Income (INR crore) | Total Expenses (INR crore) | EBIT (INR crore) | EBIT (%) | Net Profit (INR crore) | Total Income (USD millions) | Total Expenses (USD millions) | Net Profit (USD millions) |
| 2021-22 | 89.2 | 34.01 | 55.21 | 62% | 39.01 | 11.89 | 4.53 | 5.2 |
Key staff
Neil Parikh, Chairman & CEO – He has experience across wealth management, research, Institutional desk, marketing, operations, broking and client management. 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 master’s in business administration from IESE Business School, Spain and a BA in Economics from University of North Carolina at Chapel Hill.
Rajeev Thakkar, CIO & Director – He 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. He is a Chartered Accountant, Cost Accountant and CFA Charterholder.
Raunak Onkar, Head of Research – He 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.
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.
- Shortlist companies – Through quantitative screening, scrutinizing public filings etc.
- Fundamental Research – Involving the industry, peers, historical financial data, etc.
- Valuation Study – Historical and peer valuation is combined with internal estimates of intrinsic value.
- 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 has a defined coverage universe (around 25 companies). They invest in companies from our coverage universe. They are neither too concentrated nor excessively diversified. They apply quantitative filters based on leverage, return on equity, market cap and so on. They only cover companies which meet our criteria. The amc is 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 their liquid fund is to have a safe place to park short term funds and to enable Systematic Transfer Plans for their equity funds. The AMC only invests in sovereign debt and overnight money market deployment. They have small exposure to corporate debt and the AMC invests largely in sovereign papers. The AMC keeps exposures per corporate issuer small and they do their own credit analysis.
Media
Our plan is to continue doing things the right way: Neil Parikh of PPFAS Mutual Fund, May, 2023
CEO Neil Parikh talks about the three foundational pillars of investing at PPFAS : Integrity, Transparency and Discipline. He talks about consistency and building trust. He highlights one of the differentiating factors for the fund is that there are only four schemes and the reason for this conscious decision was that they only want to launch schemes if they bring value to investors. He highlights the firm’s views on equity investing as a long-term product and the short-term underperformance of the flexicap fund.
MMI interview with Neil Parikh, June 2022
Summary –
Neil Parikh became the CEO of PPFAS after losing his father Parag Parikh to a tragic car accident. He started his career at PPFAS in 2004 and then went for his MBA, and from 2010 onwards, he has been with PPFAS. He has been in various jobs, in the beginning, he was more into the institution broking and sales side, and after that, mainly in client relationships and taking care of distributors and clients. And then suddenly, the tragedy happened when his father was in a car accident in 2015. And unfortunately passed away. He then continued to do meetings with employees and the board of directors to figure out the next plans and became the new CEO.
He always believes that the tree grows as tall as how firm its roots are. And all the credit goes to his father, he thinks his father sowed the seed and was the root of the organisation and always believed that the roots have to be strong. He believes in a strong foundation and a strong value system. He mentions that growth will come eventually if they do the right things if you do the good things for the client for the distributor, because in the end, it’s all about trust, it’s all about gaining that trust and eventually will happen.
He thinks that he doesn’t need to do too much more work for the company. He doesn’t need to get too adventurous about the business. They have a great foundation. They just need to work on just growing the piece, and it eventually will happen. He further mentions that they concentrate a lot on communication, and communication became even more important for a firm like them, where there was no brand name as such. There’s no track record, it was all kind of a start-up phase. He says that it’s only been two years since the mutual funds came about.
They found that the first five years are going to be their start-up phase and if they do this, right, they get the proof of concept. He thinks the next 5 to 10 years can be really theirs, so it worked out in their favour that they built a good track record. They did a few things very differently than what the industry was doing. One is obviously having kind of very few products or one product for the longest time where they could take advantage of all the other investment opportunities in India as well as overseas.
They had a great set of clientele, which gave them the PMS time and when they started the mutual fund those were the candidates that supported them, they had about 600 clients at that point. They were all loyal clients and they stuck with us even after the tragedy. They did have a good 200 to 300 crores of AUM, to begin with, they think that helped them out and as people realise that they are trying to do something different in terms of having AGM that we have for a unit holder on a yearly basis where the unitholders can ask them any questions that they have just like the Berkshire Hathaway, AGM. He thinks people took notice of that.
They just wanted people who actually really believed in them and would stay for the long term and not be very much bothered about commercials. They think that is a bit of a risk. They are not going to move away from fund management as such, they think they have their hands full right now with the mutual fund piece. So, the concentration is definitely on mutual funds. They have no plans to have other businesses at the moment. But fund management is pretty much what they do. In terms of the number of schemes and when will they launch a new scheme moving internally, they decided on only two parameters based on which they would start the new scheme one is if they can actually have any simplification or differentiation or if it will add value to their clients and number two is they themselves are excited to put their own money in such a scheme. At present they have got a flexi cap fund, which is the biggest, then is the taxable fund and the conservative hybrid fund, which is their debt fund. They think a lot more work needs to be done on those 2 funds, so they think their main focus is going to be on these funds only. They do not have any targets of AUM at the moment, they think it is all about just trying to do the right things internally to make sure they are doing the right things and people are trained well. They need to work diligently and honestly.
MMI interview with Rajeev Thakkar, June 2022
Summary –
When talking about the firm’s investment philosophy CIO Rajeev Thakkar said, the investment philosophy has not changed since the time of the pandemic, it has been the same for decades in that sense, and they analyze companies differently over time given the change in sector Dynamics or change in technology. Buffet said that all investing is value investing and that the industry for better or worse is a mix of growth Gap and value investing. He walked us through his process and explained the factors that he uses to filter his Universe. They don’t aim to potentially invest in every listed company, so they look at the management quality and if someone has behaved badly with minority shareholders, we would filter out those promoter groups. They want predictable businesses or some sectors, they don’t want very risky companies in terms of risk of insolvency or just going out of business in the down cycle, and they need a track record of shareholder returns of minimum morose. So, they filter out around 400 companies in India and about 250 companies globally.
In terms of sell-side research he mentioned that the number of stocks the company is looking at has increased to 25 to 30. They are still able to invest comfortably in the small cap space but are taking smaller size beds as a percentage of their total scheme Investments. They are not investing in companies that are loss making or don’t have revenue at all, but rather companies that are more on the mature side of the business with actual Revenue and actual free cash flow.
He expands on their investing strategy. The company is investing in Global multinationals listed overseas, and they are not interested in any Niche businesses listed overseas. For example, Nestle is listed in India, but the parent company Nestlé is a Swiss company, and the product portfolio is something that one can understand saying anywhere. They are going for large technology and FMCG stocks that are household names, and they are not going for investments in countries where the regulation is uncertain or where there’s no history of capitalism or protecting minority shareholder rights. Someone who is familiar with Unilever in the European regions would clearly understand Indian companies. Western investors may find it difficult to understand what Hindustan does in India, or what a power grid or Adani and Reliance are doing. In sectors where regulation plays a big role, it may be difficult to add value with these stocks sitting anywhere in the world.
The firm has several distribution channels for mutual funds, including distributors, air and holders, family offices, people doing formal investment advice, and fintech platforms. The number of unique pen holders has been increasing, and the growth numbers have been reasonably good.
In terms of their analyst selections, the main requirements are, financial skills or basic technical skills, something like a CFA or CA or MBA Finance. To be a good analyst, you need to have the approach of looking at the company as a business and ownership, and the skills of understanding a particular sector. Analysts may be able to say which company is the best to invest in, but fund managers have to choose from companies across various sectors and decide what percentage of the portfolio to put in a particular company.
The overall investment strategy depends on how things play out, there is no fixed number they start with. If one is choosing an active fund, stability of the investment team is very important. It is important to align with the strategy that the fund manager is employing. So, if the investor is a Buy and Hold and someone who thinks of investing in a quality company for the long term. If there is alignment between the thinking of the investor and the fund manager, then the client will stay enlisted for long.
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 transcript –
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.
Prepared by – Partha, May 2021, Updated Anasuya Dhar Dec 2022
Updated By – Tanvi Gandhi, June 2023
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