PPFAS Mutual Fund continues to stay positive on US tech stocks
PremiumAccording to Raunak Onkar, co-fund manager and research head, PPFAS Mutual Fund, the stocks in the AMC’s portfolio have strong internal business and are part of growing sectors
PPFAS Mutual Fund has historically invested up to 35% of its assets in international stocks, mostly US technology stocks. This has been a key driver of returns in its flagship fund—PPFAS Flexicap (erstwhile PPFAS Long Term Equity). PPFAS Flexicap Fund has delivered 22.4% CAGR (compound annual growth rate) over the past 5 years far in excess of the 16.53% delivered by the S&P BSE 500 Index. Since inception on 28 May 2013, the fund has delivered a return of 20.89%. However, US technology stocks have been in correction mode since the start of 2022. The NASDAQ is down 12.7% over the past 1 month and valuations in some US tech stocks appear stretched. However, Raunak Onkar, co-fund manager and research head, PPFAS Mutual Fund, dismissed concerns about US tech and reaffirmed the fund house’s confidence in US technology stocks. According to Onkar, the stocks in the AMC’s portfolio have strong internal business and are part of growing sectors. Moreover, they do not rely on debt for growth which reduces risk from rising interest rates. Edited excerpts:
Why is there a sharp correction in the US tech stocks?
I think correction can be looked at from a slightly zoomed out perspective. So we are coming into this current time in the market where valuations have been high for quite some time. And you’re seeing some of the sectors have had quite an amplified rate of growth in the last couple of years. Due to the pandemic conditions, some business models have done pretty well. And it’s natural, that market would have extrapolated some of that. The other way of looking at it is that globally, rates are going to increase. So cost of capital will go up, and it will affect growth businesses, going forward. But I think primarily we should understand that valuations are also cyclical, something that is valued at a certain rate may not stay at that rate, if the underlying expectations change, or the broader market itself is moving from one asset class to the other.
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PPFAS Mutual Fund has historically invested up to 35% of its assets in international stocks, mostly US technology stocks. This has been a key driver of returns in its flagship fund—PPFAS Flexicap (erstwhile PPFAS Long Term Equity). PPFAS Flexicap Fund has delivered 22.4% CAGR (compound annual growth rate) over the past 5 years far in excess of the 16.53% delivered by the S&P BSE 500 Index. Since inception on 28 May 2013, the fund has delivered a return of 20.89%. However, US technology stocks have been in correction mode since the start of 2022. The NASDAQ is down 12.7% over the past 1 month and valuations in some US tech stocks appear stretched. However, Raunak Onkar, co-fund manager and research head, PPFAS Mutual Fund, dismissed concerns about US tech and reaffirmed the fund house’s confidence in US technology stocks. According to Onkar, the stocks in the AMC’s portfolio have strong internal business and are part of growing sectors. Moreover, they do not rely on debt for growth which reduces risk from rising interest rates. Edited excerpts:
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Why is there a sharp correction in the US tech stocks?
I think correction can be looked at from a slightly zoomed out perspective. So we are coming into this current time in the market where valuations have been high for quite some time. And you’re seeing some of the sectors have had quite an amplified rate of growth in the last couple of years. Due to the pandemic conditions, some business models have done pretty well. And it’s natural, that market would have extrapolated some of that. The other way of looking at it is that globally, rates are going to increase. So cost of capital will go up, and it will affect growth businesses, going forward. But I think primarily we should understand that valuations are also cyclical, something that is valued at a certain rate may not stay at that rate, if the underlying expectations change, or the broader market itself is moving from one asset class to the other.
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So don’t you think that this is the start of a multi-year rotation from growth to value?
This question has been asked not just now but also in the past couple of decades. Value under performance is a long standing phenomenon. So it’s very hard to predict where the cycle will change or whether both will do well.
Will PPFAS Mutual Fund change its stance on US tech stocks?
As to companies that we have in the portfolio, they are growth stocks, but these companies actually have very strong internal businesses. The sectors in which they operate are themselves growing. And as long as we have companies in the portfolio with a growing addressable market, and they can fund their growth internally with their own cash flow, I think it’s great. If the valuations remain in a reasonable band, we would sustain with these ideas only.
We’ll keep a watch on the valuations and how the companies keep performing going ahead. And I think one positive thing is them not relying on outside capital markets to raise money in order to fund the growth, which they have in their existing areas of operation.
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