Cloning The Parag Parikh Flexi Cap Fund | ET Money
A few months back, actually a year ago Sharat Chandra posted a tweet which caught our attention. It said in a single line "the Parag Parikh Flexi Cap Fund is a glorified asset allocator" Since inception it has annual returns of 19.32%(DIRECT PLAN) & 18.5%(REGULAR PLAN) (UNTIL 1-AUG-2022). Afterall, here's a fund which has delivered yearly returns of 19% since inception and has been regularly featured in any list of India's top 10 mutual funds. It's a fund that manages Rs 22,000 crores in assets, practices the value style of investing and is the first scheme that comes to mind when we think of a hybrid domestic plus international investing strategy. The fund has done extremely well for its investors but according to Sharat Chandra and his analysis anyone can easily duplicate the performance of the Parag Parikh Flexi Cap Fund.
📝 RESOURCES
• https://rsharat.substack.com/
• https://rsharat.substack.com/p/the-na...
📝 THE DISCOVERY
The Parag Parikh Flexi Cap Fund follows an allocation pattern which allows them to have upto 100% of their assets in domestic equities and more importantly upto 35% in foreign equity instruments. This is listed in their Key Information Memorandum and on its part, the scheme has always maintained an international allocation of at least 20% since its inception.
Infact, the scheme has had about 60% of its assets in domestic stocks, about 6% in arbitrage funds, another 6 odd percent in liquid assets and the remaining 27, 28% in international equities. Now, this combination of asset classes has helped the fund deliver above benchmark returns in most years and I'm sure you'll agree that the Nifty 500 isn't really an acceptable benchmark for any fund which keeps around 28% of its assets in foreign stocks. Which means we have to tweak the benchmark a bit and we'll take what Sharat took in his analysis i.e. a 65% allocation to the Nifty 500 and a 35% allocation to the Nasdaq 100. Now one might say, why use the Nasdaq 100? and I agree with Sharat on this as the Parag Parikh Flexi Cap fund has consistently invested and held onto stocks in big names like Microsoft, Facebook and Alphabet which occupy a significant portion in the Nasdaq. One can observe that the big variations we saw between the flexi cap fund's performance and the Nifty 500 have now subsided quite a bit with the years 2014 and 2021 being the notable exceptions.
Other than these two years, the variation between the flexicap fund and this 65-35 combination has been within a tight range which is odd for an actively managed fund like the PPFAS Flexicap fund which can choose stocks across market caps and sectors and has access to a larger universe of investible companies. But Sharat didn't just allocate capital across these two indices in his analysis but he did something that we, through our videos and our Genius offering, have always been saying i.e. it is not enough to allocate assets but you have rebalance them from time to time. So per his newsletter, Sharat rebalanced on a monthly basis thereby ensuring that the proportion of Nifty 500 and Nasdaq 100 remains in a 65-35 ratio at the beginning of every month.
The Parag Parikh Flexicap Fund's monthly NAV is tightly correlated with the performance of the 65-35 benchmark index which effectively means that this 65-35 combination of the Nifty 500 and Nasdaq 100 could conveniently and efficiently clone the performance of the Parag Parikh Flexicap Fund.
📝 CLOSET INDEXING
Now for any fund that performs as good or as bad as the Nifty 500 index one should consider the fact that the fund managers never actively invest in 500 stocks but in a much smaller number. The next argument could have been that those 20, 25 stocks are the highest weighted stocks among the Nifty 500 companies but as this data shows, that isn't really the case and the Parag Parikh Flexi cap fund continues to invest in its sector and capitalization agnostic style.
In our opinion, while the performance matches there doesn't seem to be any intent of closet indexing with the Parag Parikh Flexi Cap Fund. Infact, the argument in favor of the PPFAS fund managers is that they had the gumption (gump-shun) and conviction to invest in foreign stocks when every fund house was sticking to domestic stocks. But that doesn't mean closet indexing is not there in the Indian mutual fund space.
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