Interview with Rukun Tarachandani, Domestic Equity Fund Manager, PPFAS Mutual Fund

Radhakrishnan Chonat: Ladies and gentlemen, welcome to another episode of Fund Manager Series from AlphaStreet. I’m your host Radhakrishnan Chonat, and I’m thrilled to have you join us as we dive deep into the world of investing. And today, I have a very special guest, Rukun Tarachandani, who is the Domestic Equity Fund Manager at PPFAS Mutual Fund.

Now Rukun has over nine years of experience in equity markets, starting his career as an Equity Research Analyst at Goldman Sachs. He has also worked with Kotak Mahindra Asset Management and managed their equity arbitrage fund. Rukun is an avid reader of books on Behavioral Finance, Value Investing, and Quant Investing. He holds an MBA in Finance, a B-Tech in Information Technology, and is both a CFA Charterholder and a CQF certificate holder.

Rukun, welcome to the Fund Manager Series podcast.

Rukun Tarachandani: Thank you. Thanks, Radhakrishnan, for having me on the show.

Radhakrishnan Chonat: Excellent. Rukun, your career began at Goldman Sachs as an Equity Research Analyst, right? And you’ve now since transitioned into fund management at PPFAS, after a brief stint at Kotak. Now, how did your experience as an Equity Research Analyst at Goldman, Kotak et cetera shaped your investment philosophy? And what were sort of the key lessons and challenges you faced transitioning from an analyst to a fund manager?

Rukun Tarachandani: Yeah. So, for me, my investing journey, in a true sense or in a serious sense, started from my MBA days. And I did my MBA from MDI Gurgaon, and there, professor Sanjay Bakshi, used to have a couple of courses. So, he introduced us to two schools of thought. One was behavioral finance, which is that human decision making is impacted by behavioral biases. And second was value investing.

So, through the books on Warren Buffett, Benjamin Graham, Seth Klarman, and others, he taught us the principles of value investing, and that just appealed to me as an investment thought process. So, I entered into the industry and over those eight years that I was with Goldman and Kotak, one of the learnings was that you might read a lot about behavioral finance, and you can read books, but that doesn’t necessarily mean that you are immune from behavioral biases.

So, you can read up on it, but during times of market euphoria or panic, doesn’t necessarily mean that you’ll act completely rationally. And this is a problem that’s faced not just by investment professionals, but across domains, there is problem of mitigating behavioral biases. And one way that this has been mitigated is through the use of rules-based systems or through the use of quantitative models.

So, fortunately for me, I had an engineering background in IT, so I had an experience in coding. So, I read up books on Quant Investing and tried to fuse whatever I had learned from the value investing school of thought and whatever I learned on the quant side and tried to build quant models. So, over a period of time, using quant models as an aid in decision making is one major change that happened over that entire period of time.

And then, I was fortunate that I’d known the team at PPFAS. I’d known Raunak, I’d known Rajeev for quite a long time, and there was this opportunity to be part of the team to focus on quant models and ultimately be part of the fund management team.

One change that you have from being a research analyst to a fund manager is appreciation of taking a view of the portfolio as a whole. So, when you’re a research analyst, you are looking at a particular sector, you are looking at a particular stock, but how does that stock or how does that idea fit into the portfolio as a whole? You know, as a fund manager you can’t — even though you might like a certain sector, let’s say private sector banks, I can’t have the entire portfolio filled up with private sector banks or you need to have different kind of drivers for the portfolio so that in different kind of macroeconomic conditions, something or the other within the portfolio is working for you.

So, that appreciation of looking at the portfolio as a whole and have different moving parts within it is one change or one learning that has happened as I’ve moved towards the fund management side.

Radhakrishnan Chonat: Interesting. You mentioned Rajeev Thakkar and Raunak and the entire team at PPFAS. They’re very famous for their — sticking their convictions, sticking with their convictions for long term. And you bring in the quant aspect. Now, specifically, how do you balance these approaches of long-term pure play value investing and quant investing, which probably I’m assuming has a higher churn versus that into your decision making? And help us understand how does PPFAS bring in the quant factor into this?

 Rukun Tarachandani: Yeah. So, I think there’s a general myth or that you know, there is one quant investing. Just like in fundamental investing, there is no one way to do fundamental investing. You can have people who are doing fundamental investing but who are looking at a one year, two year kind of a time horizon or even shorter. And then you might have somebody who’s looking at five years, 10 years kind of a time horizon, right?

Similarly, in quant, there is no single quant investing framework. At the end of the day, quant is about what is your ultimate objective, and can you try and codify it into a set of rules or models? So for us, the models and quant is done with the objective of long-term investment. So the models are built with the idea that can I identify or can the model identify stocks that will generate long-term outperformance?

So, yes, vis-a-vis a pure three year, five year kind of a view, the model will have a slightly higher churn. But for us, the model is the first step in the investing process, or it is the first step in making us interested in a stock. So what we do is that we have monthly meetings around this. The model helps us identify or model ranks the stocks from the best to the worst. It helps us focus our energies on which stocks are looking interesting. At the same time, within our portfolio, if there are some stocks that are looking bad across the factor on a number of scores, then we force ourselves to ask that, “We are invested in this, does it make sense to remain invested?”

So, it’s like a first step in that process. We do not completely outsource the decision making to the model. It helps us identify opportunities and risks, but then the research analyst do their deep dive. They understand if it makes sense. Do they agree with the model? Do they don’t? And then the fundamental investing aspect takes over. So, that’s how you club both of them. What it essentially helps you to do is that it helps you take a very objective approach of the market.

So, often, to give you an example, let’s say, a research analyst or an investment manager, looked at PSU stocks five years, seven years back. They invested in the stock. The experience was not that great. And it’s human to develop a negative perception of that, right? Like, you’ll be like, “Oh, PSU investing doesn’t — investing in PSU just doesn’t work. You can’t make money here.” And then, you sort of neglect that area altogether from your research.

But if you have an objective model that’s continuously telling you, please see this. This looks interesting. This looks interesting on valuations. This looks interesting on quality, on low volatility, on all the metrics. So then you force yourself that, “Fine, irrespective of what my earlier biases or experience are, let me look at it objectively.” And so that’s how it can help you in the research process.

 Radhakrishnan Chonat: Interesting. Very interesting. Now your flagship fund, the Flexi Cap Fund, right. And you are the domestic fund manager of that. I was just looking at the May fact sheet, and you have a cash position of what 16% plus. And the markets just hit an all-time high yesterday. I mean, every day we are seeing a record. The euphoria is out of the park. Now, could you explain to us, the audience, the rationale behind maintaining such a significant cash reserve? I think, of all the AMCs, you guys are one of the highest in terms of cash position. And what do you foresee sort of the big opportunities or the challenges in equity markets in sort of the next 12 to 24 months?

Rukun Tarachandani: Yeah. So, for us, cash is a residual position that comes from our bottom-up stock picking. So, we do not go in with the thought process that because this is what the market looks like, let me have a 15% or a 20% kind of a cash. But what happens is that when valuations are expensive, then your opportunity size comes down. And, consequently, you are not able to find as many opportunities as you can when markets are very attractive, and that’s what leads to the cash build up.

So — and as a philosophy, we’ve never forced ourselves to be fully invested. We believe if there is an opportunity out there in the market, it’s interesting, we’ll go ahead and invest; else, we’ll wait for that opportunity to come. So, if you look at historically, there have been markets like 2017 or 2019 wherein we had higher cash levels. And then as markets sort of corrected, we deployed that cash very quickly.

So, today, as we look at it, if you see, valuations, on average, are expensive. I mean, the median P/E for the top 500 companies is something like 40 times, right? So, there are opportunities. Roughly 20% of the firms are trading at less than 20, 25 times price/earnings. And there are pockets of opportunity. But on average, if you speak about it, the opportunity set today is limited. And that’s essentially what has led to the creeping up of cash in the portfolios.

So, in terms of, how do we see this? One, as I said, valuations have to moderate a bit for us to be more comfortable with the markets. What is also different about this market versus, let’s say, five years or six years back is that across the board, you are seeing companies with profitability or margins that are at cyclical highs. So, you’re not just paying a higher multiple, you’re also paying a higher multiple on margins that are at cyclical highs, so which worries us a bit or which is something that has kept us a bit skeptical on being very aggressive in this market.

So at the bottom of the cycle, if your margins are extremely low, then, your optical multiple might be high. But that’s okay because as margins will move up, profitability will move up, and those valuations will normalize. Today, that is not the case. Today, across the board in many of the industries, the margins are at cyclical highs, so — and markets are essentially baking in that those kind of high margins, though at higher profitability, will sustain. So you do not have a very high margin of safety today.

So, any kind of economic shock or any kind of macroeconomic slowdown, can lead to both margins compressing and consequently your multiples also compressing. So, that’s something that makes us a bit cautious in this market.

Radhakrishnan Chonat: Interesting. Rukun, if you look at a portfolio. I think of late, you know, last six months plus, you’ve been increasing your private banking space. And I think one of those stocks almost hit the 10% limit. You guys have increased it and you entered another private bank at a time when the Founder was exiting. So, you guys have made some smart decisions when the market were against private banks and PSUs were the darling.

What sort of is playing out in terms of sectors? You have taken a huge position in the private bank. Would you continue to do that? And are there any — and we also see some exits from the broking space. So, what sort of conviction is there in terms of the sectors you are picking? And what are you bullish about? What are you bearish about?

Rukun Tarachandani: So, in terms of private sector banks, our thesis has been that over the long-term, you will see private sector banks gaining more market share from the public sector peers. During the COVID times, we had reduced our exposures considering there was uncertainty around how the credit cycle plays out. But what we’ve seen that across the board, both private sector banks and public sector banks have managed the credit cycle very well. And consequently, we feel that, particularly private sector banks are well placed. The asset quality is in good shape. They should grow at higher than the nominal GDP growth, and valuations overall are reasonable in that space.

So, that’s one sector that — one space that we like, and we’ve been increasing our exposure there. In addition to that, the other space that we’ve liked is the entire financialization of savings part, wherein, over time, you will see more depository — the role of depositories increasing, role of exchanges increasing, and so on. So, that is other space we’ve liked.

The third space that we’ve liked is the kind of opportunities that are coming in because of the energy transition that might happen. So, as you move more and more towards the renewable energy, you will need more and more grid capacity. So, you need capex to be done there. Again, what is also happening is that, in this transition, somewhere, I think the markets took a view that many of the old fuels or something like a coal will go out or will not be as relevant three years, five years down the line.

But as we are growing, as the GDP is growing, you also need more and more power capacities to be there. And, so that is, again, an area wherein we think that something like a coal will remain relevant five years, six years down the line. Again, things like gas utilities will remain relevant five years, seven years down the line. So, that entire transition that is playing out and the way market is viewing at that transition is giving us opportunities to identify investments.

The areas where we are bearish on, not necessarily because of fundamentals, but the consumer staples and consumer discretionary part wherein — again, this space has some really good companies, very well-known companies with great ROEs, ROCEs, balance sheets. But, somewhere, we’re just not comfortable with the valuations that many of these are trading at. So, they’re trading at anywhere from 60 times, 80 times to even 100 times price to earnings.

Again, in an environment wherein, five years back, you had rates, interest rates, which were extremely low. So in that kind of an environment, you could argue that the valuation multiples for some of these companies could be higher. But in an environment wherein your interest rates across the globe have increased, it is very difficult to justify the valuations that some of these companies are trading at. So that is one space wherein we do not have a lot of allocation.

 Radhakrishnan Chonat: Interesting. And sticking to the Flexi Cap, you guys were pioneers when it came to international investing before the RBA rule kicked in and sort of throttled further investments with the $7 billion limit. So Flexi Cap, which was known for taking international exposure, now sort of has reduced that, in terms of holdings and stuff. As a fund house, do you see that as a missed opportunity? You have seen, in the media, like stocks going crazy over there. And at the same time, you guys have transitioned to the domestic pretty well and maintained the returns. Is there a sort of a concern with not taking much international exposure because of the limits? Are there any other things you guys are looking forward to in terms of international exposure as well?

 Rukun Tarachandani: Yeah. So, we’ve not gone ahead and reduced the holdings or we’ve not sold our international holdings. The reduction in portfolio allocation that has happened is predominantly because, as you mentioned, there is a limit that has been hit on international holdings by the mutual fund industry as a whole. And so we could not increase our — or as we got more and more capital, we could not commensurately add our core positions internationally. And so that is why the holdings have reduced. We’ve not sold any of that.

In terms of the opportunity set, I think, many of these companies are riding on very strong long term trends, right. So, for example, the trend from physical advertising to digital advertising, right? Or the trend from on premise computing to cloud computing. As — again, as AI becomes increasingly or machine learning becomes more increasingly prevalent, more and more compute will shift to cloud computing.

Similarly, the trend from linear television to streaming television, the trend from brick-and-mortar retail to e-commerce. So, if you look at our portfolio holdings, they’re riding on these long-term trends, which we believe will sustain for the next five or 10 years. Again, the valuations of this set of firms that we own is not very expensive in our view. So we’re quite happy with the exposure that we have. Again, as I said, since there is a limit, there’s no question of adding to the allocation or increasing it. But other than that, we’re quite comfortable.

On the domestic side, I think there has been that general misconception that a good amount of the performance has come because of the international side. But, if you look at our Tax Saver Fund, which is predominantly a domestic fund, and you look at the performance of that fund versus the Flexi Cap Fund, which has a mix of domestic and international, the performances are fairly similar. So, even on the domestic side, we’ve been able to identify and we’ve invested in a lot of great firms over a period of time. So, I think the research capability and fund management capability is there to find reasonably good opportunities on the domestic fund industry as well.

Radhakrishnan Chonat: Interesting. So you mentioned about AI and you know you are from an IT background, right? So, sort of segueing a little bit, how has technology transformed the asset management industry, from when you started to now? And what innovations are you most excited about?

 Rukun Tarachandani: So, I think it’s just been a continuous process, right? So, we hear of stories that earlier even getting an annual report was difficult or somebody who had access to an annual report had an advantage versus somebody who did not have access, right? Earlier, people were putting in — going through the annual reports and making all those calculations and stuff like that, gradually transitioning into spreadsheets and models.

So, one thing that has changed is the availability of data and information. So, today, you have databases that will give you historical data for firms right from — going back 20, 25, 30 years. Also, as we’ve moved along that data, the availability of — with the increasing availability of data has made creation of some models possible. So let’s say if you were — 10 years back, if you looked at the availability of data, you probably had 10 years of market, Indian market data or Indian company’s data. And that’s, at least from a quant perspective, really not a great subset or a great sample of data.

But today, you have 25, 30 years of data on which you can create models or do more analytics around. So, the availability of data has increased. The number of providers have increased. Also, I think because of books and general awareness about quant, I think the entire appreciation towards quant style of investing has also come across. There is — there are people who understand Factor investing.

Again, 10 years back, probably, there would be few who had read on or who understood Factor investing. Today, people understand Factor investing. There’s talent available who can create models, who can do Factor investing, and stuff like that. So, that transition has happened.

Having said that, the core things around investing, the fundamentals of investing have remained the same in my view. So, the cycles of fear and panic have remained the same. The basics of investing, as probably what Graham and Buffett taught us, have remained the same. It’s just that with quant models, you can apply them to a larger set of firms in a more quicker manner. But other than that, I think the basics are still the same.

Radhakrishnan Chonat: Excellent. Shifting gears a little bit, talking about your personal journey. What advice would you give to young professionals who are watching this, who aspire to become fund managers, who have just started their career probably in equity research. Probably they’re doing their CFA Level 1. Everyone is aware of CFA, but I also saw, in your profile, you are also a CFQ. Talk us a little bit about that, and what should young aspiring professionals prepare themselves for?

Rukun Tarachandani: Yeah. So, it’s CQF, which is Certificate in Quantitative Finance. So, what I would recommend anybody who is entering the industry is, read up a lot. Start from the first principles. Read a variety of books, right? So, do the value investing side of things by Graham, Buffet, Klarman and all. Read up on other styles of investing and try and develop a style that suits to your temperament and your own liking. So, you need not clone somebody or you did not follow a specific set style necessarily. You can fuse styles. You can find your own calling. But I think that’s only possible if you read diverse. You read a variety of books. Yeah, I think that’s the way to start about it.

Radhakrishnan Chonat: Interesting that you mentioned read a variety of books. So, my next obvious question is, recommend us a few books, at least three, from across the spectrum that you felt was something that you would gift somebody or personally moved you a lot.

Rukun Tarachandani: Yeah. So, on the value investing side of thing, I think, the letters of Warren Buffett are a great read. There’s a book called Ground Rules by Jeremy Miller, which goes into Buffett’s early partnership years of investing. So that is something that appealed to me a lot. There’s a book called, You Can Be A Stock Market Genius by Joel Greenblatt, which is a wonderful primer on special situations investing. So, again, I have not found a better book. If you want to read up on special situation, I think that’s the best book.

And then there’s Margin of Safety by Seth Klarman, which I think in many ways will be the bible for a value investor. If you are an — if you want to explore the quant side of things, I would say Quantitative Value and Quantitative Momentum are two books by Wesley Gray, which are fairly approachable, not very technical, but they will give you a good flavor of how quants look at work.

And, finally, from a market’s perspective, I think there is a fair amount of randomness in the markets. In spite of your best efforts, in spite of doing all the diligence, you will not get all your calls correct, right? There is randomness that is there. And I think the best way to appreciate that randomness is to read books by Nassim Taleb, the entire Incerto series starting from, Fooled by Randomness, Black Swan black and Antifragile. So I think this is a broad set of books that I would say gives you a good flavor of all the three things.

Radhakrishnan Chonat: Excellent. Excellent set of recommendations. Rukun, outside of work, I’m sure Rajeev, Raunak, and Raj, everyone keeps you very busy. But outside of work, how do you cool off? How do you chill out? And what are sort of the ways you enjoy your time off work?

Rukun Tarachandani: So, I’m going to disappoint you on that, I think, because I’m not a very fun person in the traditional set of things. I read a lot. I read books across. So, what I generally do is, if I want to cool off, I would pick up a fiction novel or something totally unrelated to investing. So, I read up a lot. I like to travel. So, I — on vacations, I try to go on offbeat kind of places to relax and take my mind off the markets. Yeah.

Radhakrishnan Chonat: Excellent. Excellent. It’s been an absolute pleasure in understanding your philosophy, in understanding the value investing plus quant approach that you bring in. I look forward to more such discussions with you. Thank you for joining us for the Fund Manager Insight Series, Rukun.

Rukun Tarachandani: Thanks a lot. Thank you for having me on the show. Thank you very much.