A discussion about the investment strategy and performance of PPFAS Long Term Value Fund. The fund was launched in May 2013 when PFFAS decided to shut down its PMS and urged its clients to shift to their lone mutual fund.
Disclaimer: I am an NFO investor in the fund. I choose this because I was looking for a mid-cap fund and exposure to international stocks. Personally, I am quite happy with the performance.
Investment Philosophy: To invest in value stocks. That is solid businesses with long-term potential but available at a price lower than its intrinsic value. The fund makes it clear that 5 years is the minimum period that it would refer to as long-term and expects its investors to share such a view.
Asset Allocation:
Indian equity: 65% to 100%
International equity: 0% to 35%
Cash/Debt: 0% to 35%
Equity can refer to stocks or arbitrage positions.
Risk management: One of the unique aspects of the fund is its focus on risk management - in general, or due to the kind of investments that it makes. For example, because of its exposure to international stocks, currency risk and external interest rate risk arise. The fund uses derivatives to hedge such risks (more about this in a separate post).
Market-cap: The fund has no restrictions and can find 'value' across market caps. However, it does have a mid-cap,small-cap tilt most of the time.
Portfolio: I do not look at the portfolio of a fund, nor am I competent to talk about the choices the fund manager has made.
Expense Ratio: One of the biggest drawbacks of the fund is its high expense of the direct plan ~ 1% more than a fund with similar AUM. This is a big put off for potential new direct investors.
Although PPFAS has a distributor plan, it is like Quantum large a direct AMC. Much of its direct AUM is from its PMS clients and its own "skin in the game". Also to the best of my knowledge, it is the only AMC with a distributor plan that interacts 'directly' with its investors via a unitholders meet. The point is, direct clients are key for its growth and reducing the expense ratio would be a big step towards this.
Benchmark: The fund is benchmarked to the CNX 500. This is an extremely easy index for a fund manager to beat! Moreover considering the freedom the fund has to invest, I believe it is an inappropriate benchmark. An R-squared value of 0.51 shows that there is a poor correlation between the returns of the fund and returns of the benchmark.
Absolute Volatility: The active risk management shows in the standard deviation of monthly returns calculated over 3 years. According to VR, it has 3rd lowest standard deviation. The standard deviation is a measure of how much each monthly return deviates from the average monthly return. Since it is not strictly valid, think of it as no more than a crude measure.
Relative Volatility: The volatility of the fund relative to its benchmark is measured by a metric known as beta. PPFAS LTVF has the lowest beta in the category. This is probably because it does not track the benchmark closely!
Performance: As an investor, I first worry about how well the fund has done in my portfolio. The answer is quite well. More details on how I analyse this can be found here: How to review a mutual fund portfolio
Next, I have to consider benchmark outperformance. For this fund, finding an appropriate benchmark itself is a challenge.
A few days ago, I had asked Would you invest in such a mutual fund?
I had not mentioned the fund/index in that post. It is PPFAS LTVF versus a Nifty Next 50 index fund. The actual question was, "What are you paying the fund manager for? Outperformance in terms of return or risk-adjusted return?
Over 3 years, although PPFAS LTVF is less volatile, the index fund has beat PPFAS. The ulcer index (a measure of downside risk) is much lower for PPFAS LTVF consistently. This is again proof of the active risk management strategy the fund uses.
Only those investors who are comfortable with this investment philosophy should consider this fund.
Peer Comparison: The mutual fund screener says that the fund has consistently beat the category median (which divides the category into two). This is relevant only for new investors and not existing investors like me.
Conclusion: If you don't mind the high expense ratio, want the international equity exposure, value risk management, can take a long-term view and not worry about short-term downs (or ups), prefer steady performance over spectacular, this fund is suitable for you.
Other fund reviews: Check out my other fund reviews
Mutual Fund Performance Review: SBI Blue Chip Fund
Mutual Fund Performance Review: Quantum Long Term Equity Fund
Mutual Fund Performance Review: IDFC Premier Equity
Mutual Fund Performance Review: HDFC Equity Fund
You are correct in term of the text book form of risk, which is volatility. As PPFAS is less volatile, its risk-adjusted return is good. However, I would still choose to go with the index.
There are two periods which caught my attention - July-Aug 2014 and Jan-Feb 2016.
If PPFAS was low risk, I would expect it to hold its ground as compared to the market. But in fact, it fell just as much (or lower) to the same level of the market. At this point of time if I withdraw, my value is just the same. Index more volatile-Same return, PPFAS less volatile, but same return. What was the benefit of investing in a "low risk" scheme?
If you calculate the returns from the starting date, to each date the market hit a trough, I guess, the index would outperform in most periods, and would have been in line with PPFAS in the few periods mentioned above. Therefore, I would prefer investing in the index as compared to this scheme. Though the index may be volatile, I have the potential of earning higher returns. I wonder how a SIP in each would have compared.
However, this is just one scheme in comparison with the index. I wonder if there was any other scheme which fell less than the index in such down periods. If so, then they would be better choices than PPFAS.
The scheme has given a holding period of 5 years. It still has time to prove itself. But don't fall for any statistical indicators which makes this scheme look good. Just because you have invested in it, you don't need to justify it. Only time will tell whether the decision was good or bad.
Thanks for the analysis, Pattu.
I started investing in this considering there are no other 'value' funds being touted in Indian context (and of course since Mr. Parag Parekh had experienced it all before starting this fund). And over the period of time, i have come to see this fund's negative co-relation (in terms of daily movements) to rest of my portfolio holdings.
So as you have summed up, and given its international equity exposure, this 'kind' of fund looks to be a one that rounds off a bouquet of MF portfolio that an individual investor would hold (in terms of a portfolio’s risk adjusted return).
Wonder why there are no more funds like this?
Yes, they need to work on the expense ratio aspect though..
Can we compare returns of this fund with returns of PMS services? Are the returns mentioned in PMS transparent?
No we cannot. Yes PMS returns should be transparent enough.
I was curious about the tax treatment here, is it same as for domestic equity funds? Or is there a difference because of the international equity exposure? I guess it would be the former, because of the 35% limits for debt and international equity, but it would be good to be sure.
Since it has a mandate to hold 65% of Indian equity directly at all times, it will be taxed as an equity fund.
Sir please review ICICI value discovery fund.
I have enough posts on how to review it yourself.