How an obscure PPFAS morphed into India’s Berkshire Hathaway

PPFAS’s spectacular rise is mirrored within the development of its mutual fund (MF) arm. Its flagship Flexicap Fund is amongst solely 11 fairness MF schemes within the nation with belongings underneath administration of greater than 30,000 crore. The Parag Parikh Flexicap scheme was launched in 2013 with simply 150 crore in belongings. A decade later, it has grown 200 instances its dimension and delivered a shocking 18.8% CAGR, or compound annual development price. This story charts the success of Parag Parikh Mutual Fund and the unorthodox path that it took in India’s crowded MF business.

The fund was initially based as a portfolio administration service (PMS) in 1996 by the late Parag Parikh, a dealer who was additionally extremely revered as a price investor. Parikh transformed the PMS right into a MF in 2013 after maeket regulator Sebi elevated the minimal funding quantity for PMSes from 5 lakh to 25 lakh.

In its greater than 17 years of existence as a PMS, Parikh delivered a roughly 18% CAGR to his traders and constructed up a gentle following. The journey, although, was not with out its ups and downs. Parikh stayed away from sizzling expertise shares through the dot com growth and realty/infra shares in 2007. The PMS additionally underperformed in extremely bullish years, together with in 2007, and it led to some disillusioned traders choosing an exit.

This was a jolt for Rajeev Thakkar, a chartered accountant who had joined Parikh within the early 2000s and was managing the PMS. Parikh’s backing, nevertheless, saved him going. “2007 was the one time that Rajeev provided to stop as a consequence of underperformance,” recollects Neil Parikh, chief government officer (CEO) of Parag Parikh Mutual Fund.

AMCs usually provide traders a plethora of schemes, together with large-cap funds, mid-cap funds, targeted funds and worth funds. Nevertheless, when Parag Parikh launched his new fund home, he took a radically completely different strategy. There could be just one scheme on its menu and it could make investments throughout market segments and worldwide shares (as much as 35% of the corpus). It could additionally retain the flexibility to hedge throughout bull markets utilizing arbitrage (derivatives) positions. Parikh and his workforce could be open to questions on any inventory within the scheme at each annual unitholders’ conferences. There could be no gross sales targets. The AMC would develop from ‘pull’ and never ‘push’ and all distributors would get the identical fee.

“We consider ourselves as professionals, not businessmen,” mentioned CEO Parikh, explaining why PPFAS doesn’t have any gross sales goal. “A surgeon can’t set targets for coronary heart bypass surgical procedures. Doing the appropriate factor for the affected person is what issues most.”

Parikh’s radical strategy, nevertheless, didn’t work within the preliminary years. The MF business was pushed by distributors and enormous banks who cared extra about commissions. However, PPFAS wasn’t taking part in ball. Parikh’s single scheme strategy meant that he was extremely depending on that single scheme doing properly. The victory of the Nationwide Democratic Alliance, led by Prime Minister Narendra Modi, sparked an enormous market rally publish the 2014 elections and the conservative value-driven PPFAS underperformed. Then, in 2015, the AMC suffered a serious physique blow. Parag Parikh was killed in a automobile accident whereas getting back from Warren Buffett’s annual investor gathering in Omaha, US.

“We have been anxious a couple of run on the fund and made detailed plans to liquidate belongings and create a money buffer,” mentioned Neil Parikh. The panic by no means materialized. Neil Parikh took over his father’s function as CEO and the opposite key personnel continued with their jobs. But, one other bull rally in 2016-17 caught the fund home unawares. This one was led by mid and small-caps, and PPFAS had a small allocation to those segments in comparison with its friends. “At that time, it appeared like we’d by no means be capable to cross 700 crore in dimension,” mentioned Parikh.

And, then the tide modified. “When the tide turns, you understand who’s swimming bare,” goes an previous market saying.

A default in IL&FS precipitated India’s inventory market to lose steam in 2018-2019. PPFAS stood out as one of many few exceptions. US tech shares have been additionally doing properly, including tailwinds to the fund home’s international portfolio. The AMC had additionally simply accomplished 5 years of existence, bringing it on the radar of wealth managers and businesses that quickly assigned it star scores.

In 2019, PPFAS Flexicap delivered a 15.3% return, in comparison with 11% for the class. In 2020, this accelerated to a scorching 33.55% (in comparison with 16.75% for the class). “We have been sitting on 17% money when the pandemic hit,” recounts Neil Parikh. “There was concern throughout and it was tempting to attend for the market to go down additional. Rajeev, nevertheless, would have none of that. He noticed it as a once-in-a-lifetime alternative,” Parikh added. In calendar yr 2021, the scheme rose by an unbelievable 47%, beating the flexicap class’s 33.6%.

Thus started its glory days, however PPFAS has had its share of critics as properly. Some mentioned its efficiency comes on the again of a rally in US tech shares and might be replicated by merely shopping for Nifty and S&P 500 ETFs in a 65:35 ratio. With out worldwide shares, it could be only a mediocre performer, they argued. The corporate responded by launching the Parag Parikh Taxsaver Fund in 2019 that put paid to all this criticism. A purely domestic-focused fund, the scheme has overwhelmed the ELSS, or fairness linked financial savings scheme, class in each single yr of its existence.

One other innovation—a debt fund with the flexibility to take a position a small quantity in dividend-yield shares and actual property and infrastructure trusts (REITs/InVITs)—additionally proved profitable. PPFAS Conservative Hybrid Fund has delivered 7.66% since its launch in Might 2021, beating the conservative hybrid class in addition to most debt funds.

One other concern for the agency has been the declining worldwide allocation (17% at current, down from 30-35% round three years in the past) because of the MF business hitting the restrict set by the Reserve Financial institution of India for abroad allocation. This does take away a key energy of PPFAS AMC however could show a short lived problem that may be overcome as soon as India’s foreign exchange reserves strengthen and the central financial institution lifts the bounds.

All AMCs imply revert sooner or later and after three years of accelerating outperformance, PPFAS, too, hit a tough patch in 2022. Nevertheless, the AMC has all the time advocated a minimal 5-year time horizon and it has already seen a restoration in 2023. “I’ve underperformed earlier than, and I’ll underperform once more,” Rajeev Thakkar, who was now the chief funding officer, advised a stunned viewers within the 2022 unitholders’ assembly. Nevertheless, Thakkar added that this could not matter for long-term traders. For these keen to simply accept the ‘manner of the tortoise’, (implying a gradual and regular development) vital wealth creation could but be in retailer.

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