Cognito (Discretionary Portfolio Management Scheme for equity investments)
PPFAS believes in the long term wealth creation potential of equities. The long term returns from equity investments have far exceeded returns from debt investments. However the investment experience of many investors from equity investments is very bad.
The main pitfalls which result in investors facing principal loss and poor returns are
a) Investing at times of excessive optimism and market frenzy and avoiding investments when valuations are most attractive.
b) A lot of churn (turnover) resulting in high impact cost, transaction costs and taxes.
c) Incorrect selection of stocks.
Investment approach and horizon
PPFAS believes in running the investment marathon. This enables us to look beyond a particular quarter's numbers and not focus on what other investment managers are doing with their portfolios. Hence we aim to better the performance of general market indices without taking undue risk in the long term. A short term underperformance as compared to some competitors does not unduly perturb us.
While comparisons with competitors and indices is inevitable, we also keep in mind the absolute return and not just a relative performance. Hence in a situation where markets are in a frenzy, we prefer to protect capital rather than constantly attempt to outperform everybody else.
The following are the principles which PPFAS follows in its "core" equity investments.
The core holdings of clients are generally held for a long period of time. These holdings are sold only if there is a significant overvaluation of the company or the business fundamentals of the company change adversely. Investments meeting ALL
the following criteria form the core holdings of client portfolios.
i. The company is in a business with good economic characteristics and the company has a long term competitive advantage.
ii. The management of the company is very competent and works genuinely in the shareholder's interest.
iii. The shares of the company are available at reasonable valuations.
Diversification is an important aspect while investing. Diversifying across companies and industries results in lower volatility of the returns. However over diversification does not reduce volatility significantly while it dilutes the portfolio returns substantially. For example if ones best investment idea is only 2% of the portfolio it will contribute only a 2% return to the portfolio return even if it doubles.
At PPFAS we diversify the portfolio without a large dilution of the effect of our best ideas.
We generally hold between 15-22 stocks in each clients portfolio. This is as opposed to 30-50 stocks that a typical mutual fund scheme would hold.
Depending on the time at which a client's funds are available, there may or may not be stocks which meet all the core investment criteria. If enough stocks are not available because stock prices of the companies we like are too high, we stay in cash and cash equivalents. This helps us avoid the trap of investing at the time of market bubbles. This approach is not to time the markets or to benefit from their periodic ups and downs but to invest for the long term only when valuations are attractive.
We often encounter short term opportunities (non speculative). These are typically situations where the promoters/venture capitalists are making open offers for shares of companies. In these situations we sometimes find opportunities to earn annualised 14% to 20% returns. We participate in these in a small way to deploy funds for a short period of time pending investments in core holdings. Most of the churn in client portfolios comes from such short term and relatively risk free funds deployment.
Write to us for any other queries.
- Resident Indians: Rs. 25,00,000/- (Rupees Twenty Five Lakhs) [Documents required]
- Non Resident Indians (NRIs): Rs. 25,00,000/- (Rupees Twenty Five Lakhs) [Documents required]
- HUFs (Hindu Undivided Family) : Rs. 25,00,000/- (Rupees Twenty Five Lakhs) [Documents required]
- Partnership Firms: Rs. 25,00,000/- (Rupees Twenty Five Lakhs) [Documents required]
- Corporates: Rs. 25,00,000/- (Rupees Twenty Five Lakhs) [Documents required]