PPFAS Mutual Fund Review

by Manshu on April 30, 2013

in Mutual Funds

I am usually reluctant about writing a review on a mutual fund NFO as the standard conclusion for most of these is that you should wait a couple of years or so before investing in them.

Usually there is nothing that a new fund offers that is so irresistible that you overlook the fact that it has got no track record and invest immediately.

This is true for the PPFAS mutual fund also, and that’s primarily the reason I’ve held back on reviewing it. However, there have been at least two comments in the Suggest a Topic page to review this fund, and therefore I’m going ahead and doing a small post on it.

This fund is being launched by the Parag Parikh Financial Advisory Services Ltd., which is the parent company and offers Portfolio Management Services to its clients among other things. They manage Rs. 300 crores right now, and I’m fairly a certain a lot of readers are familiar with Mr. Parag Parikh himself as well.

This is an actively managed equity fund which will invest more than 65% of its assets in equity, and the rest in debt products.

The SID says that they are going to invest in securities that are trading at a discount to their intrinsic value, and that this scheme is only suitable for long term investors whose horizon for investing in stocks is at least 5 years.

I’ve seen at least a few reviews that in my opinion have gotten carried away with the description of this approach. You must appreciate that at the end of the day, every actively managed fund, and even small time investor like me is doing the same thing. No one goes in and buys something because they think it is overvalued,  everyone who is an investor (not a trader) is buying a share because they think that the company is worth more than what the share is trading for.

That in itself doesn’t make a great value investor.

Ultimately, valuation is opinion, and not a fact. Your view of intrinsic value may be significantly different from my view of intrinsic value, and then what matters is who is right.

Five years ago, I may have thought a certain company is a great company, and is severely undervalued, but today that share is just half of what it was 5 years ago, so what counts is how good am I in truly discovering undervalued stocks.

The same is true for a mutual fund as well, and what we need to see is how good is PPFAS in executing their strategy of finding undervalued stocks and investing in them.

I don’t think this can be done without a track record, and that’s the reason I started out by saying that the standard conclusion of waiting out before investing applies for this fund also.

I’d be remiss if I didn’t state that there are a lot of cool things about this fund like having a section on their website that actually discourages a certain type of investor from investing with them.

They are also quite frank with investors. Like this excerpt:

It is well known that to be successful in investing one must invest when others are fearful and divest when others are greedy. However, considering that PPFAS Long Term Value Fund is an open ended scheme, its ability to invest during bear markets will depend on your behaviour as investors. If investors desert us when prices are low, it will naturally constrain our ability to make invest when valuations are alluring.

I don’t think I have ever seen that before.

Or the fact that even the results for their PMS products are shared on their website (which has done well); this is not the norm as far as I know.

They have tutorials on behavioral finance on their website as well, which is quite rare.

All of these show good intentions, but unfortunately that alone is not enough, there is no way to tell whether these good intentions will translate into good performance or not, and that’s why I have to disappoint you with my standard conclusion of wait and watch for this fund also.

This post is from the Suggest a Topic page.

{ 8 comments… read them below or add one }

Paresh April 30, 2013 at 9:00 am

In any case,50-50% probability is always there…even for any ongoing fund its true..so one can’t say anything…mutual funds are subject to market risks.
But one thing is sure..they have come up it with right time when …technically market has limited downside & potential upside…but fundamentally.. one can not predict what will happen tomorrow.

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Manshu April 30, 2013 at 8:29 pm

I don’t know Paresh, the market always seem to have a lot of potential for downsides as well as up-moves 🙂

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Paresh April 30, 2013 at 9:35 pm

No one knows it infact..its mere an optimism..most of mutual fund investors like me are waiting for a good year ahead…

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Kamsam April 30, 2013 at 3:44 pm

Some numbers from their PMS performance sheet of Sep-2012:
If you rebase all PMS, Sensex and Nifty to November 1996 at 100, till 5 years back (Sep-2007) PMS was slightly underperforming both Sensex and Nifty. From 1996 to 2007 they were trailing 2 indices.
So the entire outperformance is between 2007-2011, not a good sign. I am okay with a few years of underperformance but for 11 years if you get index returns you might as well buy the ETF. Seems like they got lucky the last 4 years (2007-11)

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Manshu April 30, 2013 at 8:14 pm

Thanks Kamsam, is there a way you can share the spreadsheet? Perhaps if you made a Google Doc…I’d like to see how you calculated this.

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Kamsam April 30, 2013 at 9:44 pm

It’s simple calculations, will elaborate a bit here
Step 1: Assume Novmebr 1996 PMS, Sensex and Nifty are at 100
Step 2: Using the annualized return PMS (15.94%), Sensex (13.23%) and Nifty (13.06%), calculate Mar-2013 levels for all 3.
Step 2 A: PMS -1,119; Sensex-761; Nifty-742 (Mar-2013 levels from a rebased level of 100 in November 1996)
Step 3: Calculate Mar-2012 levels for all 3 using last one year returns
Step 3A: One year returns for PMS (-1.02%), Sensex (8.5%) and Nifty (7.6%). Calculating back from Mar-2013 levels, Mar-2012 levels for PMS-1,131; Sensex-701; Nifty-690
Step 4: Calculate Mar-2010 levels for 3 using last 3 year returns
Step 4A: Three year returns for PMS (4.39%), Sensex (2.55%) and Nifty (2.81%). Calculating back from Mar-2013 levels, Mar-2010 levels for PMS-984; Sensex-705; Nifty-683
Step 5: Calculate Mar-2008 levels for 3 using last 5 year returns
Step 5A: Five year returns for PMS (13.66%), Sensex (4.48%) and Nifty (4.59%). Calculating back from Mar-2013 levels, Mar-2008 levels for PMS-590; Sensex-611; Nifty-593

So if you look at performance from November 1996 to Mar-2008
A- PMS has moved from 100 to 590 (CAGR of 16.96%)
B-Sensex has moved from 100 to 611 (CAGR of 17.32%)
C- Nifty has moved from 100 to 593 (CAGR of 17.01%)

It’s marginally worse but 11+ years is a lot of time for a “so called value fund” to not even able to match the index. Also if you actually pull-in the “Total return index” which is what ETF should be able to deliver and deduct 0.5% as ETF expense, the underperformance for this period (Nov-1996 to Mar-2008) is over 2% CAGR. Significant i think!

Sorry for a long explaination of a random calculation 🙂

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Kamsam April 30, 2013 at 10:02 pm

Another point i forgot to mention, i looked at HDFC Equity during same time (Data from Moneycontrol website)
HDFC Equity NAV details
1-Nov-1996: 5.71
31-Mar-2008: 165.788
31-Mar-2010: 236.272
31-Mar-2012: 261.673
31-Mar-2013: 271.109
CAGR from Nov-1996 to Mar-2013 is 26.5% compared with PMS returns of 15.93%
Returns comparison:
Last 1 Year: HDFC 3.61% Vs PMS -1.02%
Last 3 Years: HDFC 4.69% vs PMS 4.39%
Last 5 years: HDFC 10.34% vs PMS 13.66%
Nov-96 to Mar-13: HDFC 26.5% vs PMS 15.93%

I would rather stick with Prashant Jain i guess 🙂

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Manshu May 1, 2013 at 6:50 am

Thank you for the detailed explanation. I was thinking about using this for a larger set of data but it may just be too time consuming to carry out. I think stats on something like how many times a mutual fund has beaten the index will be quite useful but perhaps this is not the right way to get at it.

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