This fund manager is wary of PSU stocks

Rajeev Thakkar has an old-world charm that is rare in the world of modern investing. He is a quiet, soft-spoken man who is unmoved by over-exuberance so visible in the stock markets. He picks stocks with great care and likes sticking with them through years. A calm, unruffled look complements the nature of this chief investment officer of PPFAS Mutual Fund who likes to read books, play chess and listening to music.

In an interview with Money9, he shared his stock-picking formula. Excerpts:

Q: How did you end up being a fund manager?

Thakkar: The Oxford dictionary defines the word “zeitgeist” as the defining spirit or mood of a particular period of history as shown by the ideas and beliefs of the time.

The spirit or mood in 1992 (my graduation year) was stock markets. Just as someone graduating today would likely be tempted by tech startups, a lot of people in my graduating class got drawn to capital markets. The fact that my father was an equity investor for a long time helped me in gaining a basic understanding of the space and on completion of my Chartered Accountancy course, I was full time into financial markets.

Q: Can you shed some light on your investment philosophy when it comes to picking up a stock?

Thakkar: At the root, owning a stock is owning a portion of the business. We place a lot of importance on promoter/management integrity and competence. The business should preferably be asset-light and employ low leverage. The financial return ratios like Return on Capital Employed (ROCE) should be good and there should be attractive growth opportunities. Finally, the valuation should be reasonable.

Q: What gives you the confidence to hold on to multi-baggers?

Thakkar: As they say, the proof of the pudding is in eating it. After we buy a stock, the actual developments in the business should broadly support our investment thesis. Of course, we give a long enough time frame for the business to execute its promise. However, if the outcome is not what we expect we would exit the stock.

Companies that execute strategy efficiently over time are the ones where we continue to hold on and these turn out to be multi-baggers in due course.

Q: Where did you fail and what were the lessons learnt?

Thakkar: A large portion of stocks that did not do well for me came from the PSU or regulated space. Oil marketing companies like HPCL, toll road company like Noida Toll Bridge etc. Changing legal and regulatory landscape and populist policies have made this space adversarial to generating returns. We are not holding these stocks currently. The lesson is to be wary of the legal, regulatory and policy risks.

Q. Who is your investment guru and which books are you reading currently?

Thakkar: Warren Buffet and Charlie Munger have been big influences in my investment approach.

Currently, I am reading “The reluctant Billionaire” a book on Dilip Shanghavi and “The Market Mafia” and “Absolute Power” on NSE.

Q. Which sectors will do the catching up and should one go bargain hunting at current levels in these sectors?

Thakkar: Focusing on sectors may be misleading as different companies in the same sector may behave differently. In the retailing space, for example, a well-run retailer has come out very strong from the pandemic whereas another one had to sell out in distress. It is better to focus on individual companies and develop comfort in owning those for the long term. Focusing on transient factors like the Covid second wave, a potential third wave and so on and trying to tinker with investments based on those factors usually does not work out well.

Q. Top three advices be to an individual investor?

Thakkar: An individual investor needs to:

a) Select an appropriate asset allocation for investments and then stick to it through ups and downs in the markets.

b) A very small set of individuals have the skill sets and the temperament for direct stock investing. If one is not equipped to do direct investing, using the mutual fund route is great for non-full-time investors in the markets.

c) Start early and do not interrupt the compounding process. Investing is not a get rich quick vehicle for most. It is a “get rich steadily” process.

Q. As an individual what would you prefer, direct stocks or mutual funds, and what is your biggest investment in life?

Thakkar: My financial market investments are only via mutual funds and the only stock that I own is unlisted shares of my employer Parag Parikh Financial Advisory Services Ltd. The biggest investment is in our mutual fund “Parag Parikh Flexicap Fund”.