PPFAS Mutual Fund remains positive on US tech stocks

Why are US tech stocks falling sharply?

I think the improvement can be seen from a slightly zoomed out perspective. So we are entering this current market where valuations have been high for a long time. And you see that in the last few years the growth rate of some sectors has increased significantly. Due to the pandemic situation, some business models have performed very well. And it’s only natural that that market would have expanded some of that. Another way of looking at it is that rates are going to go up globally. So the cost of capital will go up, and it will affect growth businesses going forward. But I think primarily we should recognize that valuations are also cyclical, that something valuable at a certain rate may not stay at that rate if underlying expectations change, or the broader market itself is moving from one asset class to another. Used to be.

PPFAS Mutual Fund has historically invested up to 35% of its assets in international stocks, mostly in US technology stocks. This has been a major driver of returns in its flagship fund- PPFAS Flexicap (formerly PPFAS Long Term Equity). PPFAS Flexicap Fund has given 22.4% CAGR (Compound Annual Growth Rate) in last 5 years, which is higher than 16.53% given by S&P BSE 500 Index. Since its inception on 28 May 2013, the fund has given a return of 20.89%. However, US technology stocks have been in correction mode since early 2022. The NASDAQ is down 12.7% over the past 1 month and valuations in some US tech stocks appear inflated. However, Raunak Onkar, Co-Fund Manager and Head of Research, PPFAS Mutual Fund, dismissed concerns about US tech and reaffirmed the fund house’s confidence in US technology stocks. According to Omkar, the stocks in AMC’s portfolio have strong internal turnover and are part of growing sectors. Furthermore, they are not dependent on debt for growth which mitigates the risk from rising interest rates. Edited excerpt:

Why are US tech stocks falling sharply?

I think the improvement can be seen from a slightly zoomed out perspective. So we are entering this current market where valuations have been high for a long time. And you see that in the last few years the growth rate of some sectors has increased significantly. Due to the pandemic situation, some business models have performed very well. And it’s only natural that that market would have expanded some of that. Another way of looking at it is that rates are going to go up globally. So the cost of capital will go up, and it will affect growth businesses going forward. But I think primarily we should recognize that valuations are also cyclical, that something valuable at a certain rate may not stay at that rate if underlying expectations change, or the broader market itself is moving from one asset class to another. Used to be.

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So don’t you think this is the start of a multi-year cycle from growth to value?

This question has been asked not only now, but also in the last few decades. Price under performance is a long standing phenomenon. So it is very difficult to predict where the cycle will turn or whether both will do well.

Will PPFAS Mutual Fund change its stance on US tech stocks?

As far as the companies in our portfolio, they are growth stocks, but these companies have really strong internal businesses. The areas they work in 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 that’s great. If valuations remain in a reasonable band, we will only stick with these views.

We will keep an eye on valuations to see how the companies continue to perform. And I think one of the positives is that they are not dependent on external capital markets to raise funds for growth, which is in their existing areas of operation.