Diversification across geographical boundaries can help mitigate portfolio risk. Exposure to foreign equities can potentially give you higher returns when other economies grow at a faster pace than the domestic economy.
It also enables you to exploit a particular opportunity only available in offshore markets. Moreover, it can act as a hedge against rising foreign expenses such as foreign education and travel.
However, do note that just like every investment, investment in offshore equities carries certain risk. Changes in government regulations and policies relating to companies, industries, investments; geopolitical events, economic growth and so on impacts the attractiveness of investment. Therefore, to take exposure to foreign equities prefer worthy mutual fund that focuses on safety and stability.
Parag Parikh Long Term Equity Fund (PPLTEF) is one such multi-cap fund with a hint of value-style approach focusing on long term capital appreciation from undervalued stocks available at decent margin of safety. It offers diversification to offshore stocks as well.
Graph 1: Growth of Rs 10,000 if invested in Parag Parikh Long Term Equity Fund 5 years ago
Data as on October 20, 2020
(Source: ACE MF)
Classified under multi-cap funds category, Parag Parikh Long Term Equity Fund (PPLTEF) is mandated to follow a multi-cap strategy. However, the fund’s orientation remains more towards value style of investing, whereby it aims to invest in quality stocks available at reasonable or attractive valuations. What differentiates PPLTEF from the rest is its ability of not limiting the portfolio to only domestic equities. The fund invests nearly one-third of its corpus in stocks of offshore companies. An investment of Rs 10,000 in PPLTEF five years ago would have appreciated to Rs 19,653, a CAGR of 14.5%. A similar investment in the benchmark Nifty 500 – TRI would have grown to Rs 15,008, a CAGR of about 8.5%. Despite following a cautious investment strategy, PPLTEF has generated substantial alpha over its benchmark.
Table: Parag Parikh Long Term Equity Fund’s performance vis-à-vis category peers
|Scheme Name||Corpus (Cr.)||1 Year (%)||2 Year (%)||3 Year (%)||5 Year (%)||7 Year (%)||Std Dev||Sharpe|
|Parag Parikh Long Term Equity Fund||4,798||22.99||17.80||13.15||14.45||17.75||18.50||0.150|
|Quant Active Fund||66||21.47||15.28||11.12||12.48||19.40||23.80||0.101|
|UTI Equity Fund||11,386||13.80||13.07||9.64||9.98||14.59||20.65||0.082|
|Canara Rob Equity Diver Fund||2,413||11.30||14.00||9.01||10.36||13.71||19.08||0.075|
|Union Multi Cap Fund||374||8.74||11.22||5.90||7.76||10.93||20.17||0.033|
|DSP Equity Fund||3,668||1.95||12.66||5.56||9.74||14.96||21.47||0.030|
|Kotak Standard Multicap Fund||29,551||2.43||9.40||5.07||10.25||16.19||21.16||0.022|
|LIC MF Multi Cap Fund||293||0.00||8.25||4.72||5.06||9.29||20.24||0.018|
|SBI Magnum Multicap Fund||8,870||-2.29||7.31||2.52||9.00||15.83||20.79||-0.010|
|ICICI Pru Multicap Fund||5,232||-4.90||0.71||1.97||6.54||13.01||21.92||-0.017|
|NIFTY 500 – TRI||3.91||7.42||4.14||8.45||12.15||21.92||0.015|
Returns are point to point and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on October 20, 2020
(Source: ACE MF)
*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.
Amidst sharp volatility seen over the last two years, PPLTEF has ranked among the list of top quartile performers and has shown a stark outperformance over its benchmark and most of its multi-cap peers. In fact, PPLTEF has generated substantial alpha over its benchmark Nifty 500 – TRI as well as category peers across time periods.
With a Standard Deviation of 18.50, the fund’s volatility has been lowest in the category and is far lower than the benchmark (21.92) and the category average of 21.71. Moreover, the Sharpe Ratio of the fund at 0.15 is one of the highest in the category and much ahead of its benchmark. PPLTEF clearly stands out with potential to deliver superior risk-adjusted returns for its investors.
Investment strategy of Parag Parikh Long Term Equity Fund
PPLTEF seeks to generate long-term capital appreciation from an actively managed portfolio primarily of equity and equity related securities. Its investment universe is not restricted to any specific sector, market capitalisation or geography. Other than domestic equities, the fund invests up to 35% of its assets in foreign securities. However, an average of 65% of its corpus needs to be invested in listed Indian equities, in order to benefit from the favourable Capital Gains tax treatment accorded to equity schemes.
While picking stocks for the portfolio, the fund managers follow an active investment strategy primarily based on fundamental research driven bottom up stock selection approach. They focus on key parameters like growth opportunities, sustainable competitive advantage, industry structure, margins, quality of the management, and protection of minority shareholders. The fund managers give high importance to intrinsic value of the business and endeavour to purchase stocks that represent a discount to this value in an effort to create value for investors, maintain margin of safety, preserve capital and generate superior growth.
Graph 2: Top portfolio holdings in Parag Parikh Long Term Equity Fund
Holding in (%) as on September 30, 2020
(Source: ACE MF)
PPLTEF makes its investments with a long term perspective and follows a buy and hold investment strategy, to realize the full potential of the stocks it has bought in the portfolio. Among domestic equities the fund holds top exposure in Persistent Systems (8.3%), ITC (7%), Mphasis (5.6%), Hero MotoCorp (5.3%), and Bajaj Holdings & Investment (4.5%). Amazon is the fund’s largest foreign equity exposure (7.4%), followed by Alphabet Inc. (6.9%), Facebook (5%), and Microsoft (4.7%).
Among domestic equities, names like Persistent Systems, Balkrishna Industries, Mphasis, Ipca Laboratories, Dr Reddy’s Laboratories, Hero MotoCorp, Cadilla Healthcare, etc. have boost the fund’s performance over the last one year; whereas financial services stocks like Bajaj Holding & Investment, Axis Bank, HDFC Bank, ICICI Bank, etc. have turned out to be the laggards in the fund’s portfolio.
As on September 30, 2020, about 27.7% of PPLTEF’s portfolio was exposed to offshore equities. Banking and Finance together account for another 19.3% of its assets, followed by Infotech, Consumption, Pharma, Auto, Power, Auto Ancillaries, and Leisure.
PPLTEF has shown a drastic turnaround in terms of performance in the recent corrective phase and has executed confidence among its investors, even though the fund is not among the best in the bull periods. PPLTEF’s focus across market caps and geographies enables it to remain flexible enough to deal with the changing market sentiments. Its bet on fundamentally sound undervalued stocks has benefited the fund so far. With experienced fund managers at the helm, PPLTEF seems to be in capable hands.
Although there may be bouts of underperformances and the returns may not come in easily, PPLTEF is well equipped to reward investors over complete market cycle. PPLTEF is suitable for pure long term investors with high risk appetite looking out for a fund that can offer diversification along with decent margin of safety and stability.
Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This article first appeared on PersonalFN here