Fund Call | Parag Parikh Long Term Equity: A multi-cap fund with many hats

Polarised market conditions over the past year have seen just a handful of stocks driving the Sensex and the Nifty to new highs, even as a majority of the listed universe have lost ground.

Amidst this contrast, the good performance of a few funds such as Parag Parikh Long Term Equity has stood out.

Strong show

With a one-year return of about 16 per cent, the multi-cap fund has comfortably beaten its benchmark, the Nifty 500 TRI (11.7 per cent return), and the multi-cap category average (12.5 per cent). Over longer time periods of three and five years, too, the fund, with annualised returns of about 14 per cent and 11 per cent, respectively, has beaten its benchmark, and is in the top quartile of the category.

The fund has also done well in weak market conditions — losing less than the benchmark and the category in CY2018, for instance. Containing downsides well and participating in upsides have seen it deliver a healthy annualised return of about 16 per cent since its inception in May 2013.

Investors can consider buying the fund through the SIP route as part of their core portfolio.

The scheme’s good show has been thanks to a few factors — a value-focussed investment approach that has paid off in the long term despite some bouts of underperformance in the short term, focus on high-quality stocks, flexibility to shift allocations across market-caps that has been used to good effect, and a significant allocation to global stocks that have provided diversification benefits and a good upside.

Value-investing strategy

The fund does not shy away from taking conservative positions and significant cash calls when the market and stocks seem overvalued. When the tide turns, the dry powder is put to use.

For instance, as of June 2018, the fund’s cash holdings, debt and arbitrage positions had been increased to nearly a quarter of the corpus. As of March 2019, such holdings accounted for about 20 per cent of the corpus; it has since been reduced to about 11 per cent, as of December 2019.

Parag Parikh Long Term Equity picks stocks using a bottom-up investing strategy, focussing on individual companies.

It has done well in its stock shifts across market-cap categories. An increase in allocation to large-cap stocks over the past couple of years has stood the fund in good stead.

From about 31 per cent of the fund’s corpus as of December 2017, the domestic large-cap allocation has been increased to nearly 45 per cent as of December 2019. During this period, the mid- and small-cap allocations were reduced to a fifth of the corpus from about a third. The fund’s holdings across market-caps are high-quality names that can typically navigate market cycles better. For instance, the top large-cap holdings include HDFC Bank, Bajaj Holdings and Investment, ICICI Bank and Hero MotoCorp.

Stocks in the mid- and small-cap categories include Balkrishna Industries, Persistent Systems and Mahindra Holidays.

Global diversification

Parag Parikh Long Term Equity also offers exposure to high-quality foreign stocks, in addition to domestic ones. This is a key differentiator in the multi-cap fund category.

As of December 2019, the overseas stocks in the portfolio — Alphabet (Google’s parent company), Amazon, Facebook, Suzuki Motor Corp, Nestle and 3M — account for about 29 per cent of the portfolio.

The fund hedges most of its foreign currency risk exposure.

Despite the foreign stock holdings, the scheme is considered equity-oriented and is eligible for concessional tax treatment, as it invests at least 65 per cent of its corpus in Indian stocks and arbitrage positions.

As of December 2019, the fund has a compact portfolio of about 20 domestic stocks and five foreign stocks. At 9.4 per cent of the corpus, Alphabet is the fund’s largest holding, followed by HDFC Bank (9.17 per cent) and Bajaj Holdings (8.81 per cent).

The largest exposure is to the banking sector (about 20 per cent of the corpus) followed by internet and technology (about 15 per cent).

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