When an equity fund is founded on the philosophy of value investing, seeks to reduce volatility through limited hedging and provides international flavour where such opportunities are not available locally, we call it an all-in-one fund. The fund we are talking of also has an expense ratio lower than the equity category average, considering its relatively small AUM size. This cost is especially low within the regular plan. Such tightly managed cost signals that the investor comes first.
This fund, part of our Prime Funds, is a must have for all long-term portfolios of 5-7 years and above. Willingness to hold through periods of underperformance when the market is high is a must for this fund. What makes this fund stand out from the rest of the multi-cap space and should you use it? Read on.
Parag Parikh Long Term Equity (PPLTE) is a value-tilted fund with a multi-cap strategy. It can invest across market cap and is sector agnostic, focusing primarily on picking good stocks at reasonable valuations. It invests 20-30% in international stocks. It does not hesitate to hedge its portfolio during volatility and up the game on market corrections.
PPLTE is a fund that believes in buying and holding stocks, but tweaking weights based on valuation and market conditions. The fund is reluctant to hold high equities in rallies that run on high valuation territory. As a result, underperformance in prolonged rallies is a characteristic that investors need to get used to, with this fund.
As a peer set to compare performance, we took the entire list of multi-cap, focused, value, contra and dividend yield funds. PPLTE stands out for its ability to contain declines. The downside capture ratio helps measure how much the fund falls when compared with the index in falling markets. We took the monthly rolling returns over 3 years to rigorously test the fund. This showed a downside capture of 26%, the lowest in the space. That means the fund declined only 26% as much as the index in a falling market! The category average for the same period was 86%.
We think this is the biggest strength of PPLTE; it is well proven in the Indian market that funds containing downsides tend to deliver better in the long term. The fund’s ability to beat peers overall is also high. When 3-year returns were rolled for 6 years, the fund beat peer average 76% of the times. Its Sharpe at 0.95 (rolling 1-year returns) is now the best in the category, thanks to lower volatility. Only Kotak Contra and Canara Robeco Equity Diversified come close to this.
That said, the fund does underperform in rallies that are narrow like 2019, or rallies that run on stretched valuations like 2017 because of its strategy to cut equity risks in overheated markets. It is also important to note that given its exposure to US markets, a correction there can impact the fund’s performance compared with peers.
The second standout feature of PPLTE is its deft moves in hedging equity using derivatives and through overseas exposure. For example, the fund hedged as much as 15% using stock derivatives in February 2019. By July 2019, once the froth in the local market was contained by a swift correction, it reduced its hedging steadily to 5.6% as of January 2020. But all the while, it kept its US-stock at close to 28%.
With Indian stocks, the fund does appear value conscious. Other than stocks like HDFC or Lupin, its Indian stock holdings have a P/E lower than 20 times. The value argument, though, is hard to make with its international holdings.
For example, while ADR/GDR options of Suzuki Motor or Nestle SA may be better value buys compared with their more expensive counterparts in India, other stocks such as Alphabet or Facebook cannot be called value. But the plus point of these stocks is that they provide exposure to segments unavailable in India. Also, this ensures that there is some ‘growth’ in the portfolio. Its moves in international stocks have also been well-timed. For example, the fund completely exited 3M Company in December 2019. The stock fell 14% since after earnings did not beat street expectations and management raised concerns over environment liabilities.
Apart from using derivatives to hedge its Indian stocks, PPLTE also used currency derivatives to hedge (80-100% of its foreign exposure) against any volatility in foreign currency. Sometimes, it also gains from this strategy.
If you decide to hold PPLTE, the following points are noteworthy:
- The fund needs a longer time frame of 5-7 years and is therefore suitable only for long-term portfolios.
- It can be used along with other multi-cap funds, thanks to its unique strategy, or with index funds (see our Prime Funds for other multi-cap or index fund options).
- The fund may be the odd one in your portfolio, underperforming in a rally at times, or underperforming when Indian market is doing well, due to its international exposure. This cannot be avoided in this all-in-one fund.
The fund is managed by Rajeev Thakkar and had assets of Rs 2784 crore as of January 2020. It has exit load up to 730 days.