So, here's Part III of our @PPFAS Mutual Fund Distributor concall series. In this newsletter, we will talk in detail about the value investing philosophy which drives the fund manager's decisions at PPFAS Also, we will cover their selection and positioning process. “ITC and Coal India.?” You might ask with a smirk!
Here could be why.
The Overarching Value-Investing Philosophy
Their June portfolio disclosures raised quite a few eyebrows. A 5% position in Coal India and a substantial holding in ITC saw PPFAS yet again going against a popular trend and sticking to their value investing principles at all costs.
I remember watching a Rajeev Thakkar interview on YouTube where he succinctly speaks about value investing. He said that there are two frameworks for value investing-One based on Graham's approach of buying cheap companies (low P/E, high div. yield), which is very difficult in India.
He said that these companies are available cheap because either they have governance issues/they are simply poor at capital allocation/they're PSUs, or the industry is not going to grow at a significant rate in the future.
And the 2nd school of value investing that PPFAS follows for Indian markets is to buy quality businesses(high ROE, ROCE) that are less capital intensive and cheap. However, they've also gone full Ben Graham when the opportunity arises. E.g. Coal India and Powergrid.
They buy for the long term & the low pf turnover ratio of their equity schemes is proof of that. They encourage their investors to have an long-term view of their investments in their funds in sync with the mantra-"the ability to delay your gratification will give you success."
The Great Filter
So how do they filter the stocks? Mr Thakkar mentions in the concall that PPFAS invests only in companies which are run by quality, honest management after carefully looking at the debt ratios, & on which they see a substantial return on investments.
Post the great filter; they would have a subset of around 700 investible companies-200 foreign and 500 domestic. These are then sectorally divided and assigned to the respective sectoral analysts who track the companies across geographies.
This gives them an understanding of the relative valuation of different companies of the same sector in several geographical markets. They then pitch their thesis to the investment team, who would then decide on about 25-30 stock ideas. This is a sweet spot for them as this number of stocks their portfolio super concentrated & at the same time, doesn't dilute their best ideas.
Position Sizing
Given that we have about 25 to 30 stocks in our overall portfolio, the average weightage of stock in their portfolio would be typically between 3% and 4%. Except, for the pharma companies(5 companies with 1% each).
The remaining stocks should ideally take up roughly 4-5% of the pf each. But the position size of these companies may vary based on certain factors:
1. The company's price movement brings up or down the position size of their portfolio stock.
2. The other factor would be the relative attractiveness of that company. Sometimes the investments would be made staggered, i.e, if the earnings are going up & the stock price was to stagnate or comes down, they may increase the weightage.
3. Taking liquidity into account, they don't go beyond a certain position size or a percentage of the overall company/market volume. (Happens rarely with them).
So, roughly the weightage of each of their portfolio stocks (except pharma) would be in the 3% to 9% range.
Kindly zoom-in on the infographic for a sector-wise position sizing of the PPFAS Flexi Cap Fund.
Our Gratitude
It's really helpful for an investor to catch a glimpse of the process a fund house follows in constructing its pf of stocks. And kudos to team @PPFAS for making it this transparent. Hope you find value in our attempts to squeeze the juice from the concall transcript.
Hope you find value in our attempts to squeeze the juice from the concall transcript. We try to bring out something extra along with our commentary as well in terms of infographics and information.
https://amc.ppfas.com/distributors/conference-call/
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