How American stock markets helped an Indian mutual fund tide over the Covid-19 slump

Earlier this year, when the Indian stock markets were grappling with the impact of the Covid-19 pandemic and the ensuing lockdowns, one local mutual fund became the talk of the town for managing to remain in the black despite all the doomsday predictions.

In July, the Parag Parikh Long Term Equity Fund delivered a year-on-year return of 17% in comparison to the average 0.56% by its peers.

Its secret? The fund invests around 35% of its assets in global markets and 65% in Indian equities. This meant that even as Indian stock markets were recovering, US equities – particularly the shares of American tech giants such as Amazon and Alphabet – were keeping the fund in good health.

“At any given time frame, no one country or market does well all the time…” Rajeev Thakkar, chief investment officer at Mumbai-based Parag Parikh Financial Advisory Services told Quartz in an interview. “Investing a portion of the portfolio abroad gives additional opportunities and reduces country-specific risk and volatility.”

From the rise of tech stocks to value investing and diversification, Thakkar shared the fund house’s investment strategy, which has made it popular among investors.

Excerpts from the interview:

What is your investment strategy, and how did it lead to Parag Parikh Long Term Equity Fund beating all its competitors?
Our investment approach has remained the same over the years of buying quality companies at reasonably attractive prices. We like to partner with minority shareholder-friendly managements, and that remains a rigorous filter at the time of selecting our investment universe. We try and avoid companies with large amounts of debt or those that are highly leveraged and we typically ride through the businesses along with the promoters for an extended period.

Why did you decide to have exposure to global equities?
At any given time frame, no one country or market does well all the time. In any case, most large caps in India have very significant global exposure. Our Information technology and pharma companies export to overseas markets.

Corporates like Tata Motors (Jaguar Land Rover) and Hindalco (Novelis) have made acquisitions abroad, and a lot of their income comes from overseas markets. Indian commodity-related companies are also dependent on global prices for their profitability. Investing a portion of the portfolio abroad gives additional opportunities and reduces country-specific risk and volatility.

With the tech stocks valuations extremely high, will you continue to hold in your portfolio? Is the tech bubble about to burst?
There can be severe volatility in stock prices, and the technology-related shares have had their fair share and more of this volatility. Even though all these companies are labelled as tech, they are very well diversified companies operating across different sub-sectors. For instance, Amazon is present across e-commerce, logistics, cloud computing, retail marketplace and you need to evaluate each of these segments separately.

Will it tech bubble burst? I do not know but what I do know is that the companies which we hold in our portfolio look reasonable in terms of valuations and have a huge headroom to grow in the future.

Going forward, will the US equities continue to outperform their Indian counterparts?
It is futile to predict which market will do well over the next few years. The whole purpose of having global exposure in our fund is that different markets perform at different points in time and having a diversified portfolio reduces the volatility in returns.

The automobile sector has had a cyclical downturn over the last 2 years to 3 years, and we could see a bounce back there due to a shift towards personal mobility.

Which businesses or sectors will come out of the Covid-19 slump stronger globally and in India?
There are many sectors that have been severely impacted due to Covid-19 like aviation, hotels, hospitality, etc. The easiest thing to do is to eliminate all highly leveraged companies in these sectors since most of the capacities in these sectors are perishable.

There are some specific sectors where the stronger players, with their supply chains being effective, have been able to take market shares from relatively weaker or unorganised players. Also, most of us were working from home during the lockdowns without any hassles thanks to the technology that we have today.

IT and pharma are sectors that could come out stronger. The automobile sector has had a cyclical downturn over the last 2 years to 3 years, and we could see a bounce back there due to a shift towards personal mobility. Financial services companies may face some issues due to higher provisioning and bad loans in the shorter term.

Do you have any plans to announce new funds in the near future?
Not in the near term, but there has been demand from our unitholders and partners for a relatively safer debt product from our fund house. We have started work on this, but it is too early for me to comment anything on this.

This article first appeared on Quartz.