Why do you think a multi cap fund is a ' must have’ in every investment portfolio?
Post categorization and rationalization of MF schemes by SEBI, a large cap or mid cap or small cap fund is mandated to allocate a minimum of 80% or 65% assets to their respective market capitalization stocks.
On the other hand, multi cap funds offer flexibility to the fund managers to change the composition of the portfolios across market capitalisation depending on opportunities available.
What is your view on the valuations in each segment of the market – large, mid, small cap stocks?
On the valuation front, while the large cap indices have gone up considerably, we see opportunities in the mid and small cap space. Despite the challenges on the macro front, several businesses have benefitted from reduction in competitive intensity due to weaker players exiting the space, improving market share, low cost advantage due to benign commodity prices and formalisation of the economy due to GST.
Only a handful of stocks have driven the stock market recently. While expensive stocks have been getting pricier, those at opposite end of spectrum saw their valuations beaten down. Do you see this trend continuing in 2020 as well? What is your strategy to pick stocks in this scenario?
The stock markets in 2019 have seen massive polarization with only a select set of companies participating in the rally. While earnings recovery is likely to remain muted particularly during H1 2020, during H2 we expect a more broad-based recovery in earnings on the back of a broad turnaround in the economy and low base effect. Hence, we expect the market breadth to improve in 2020.
Stock selection will continue to remain a differentiating factor given that markets may reward earnings visibility in companies, irrespective of their market cap segment.
Take us through the investment and product strategy of Principal Multi Cap Growth Fund. How is it different from other schemes in the market?
Our in-house research coupled with the external and third party research reports form the nucleus of our equity investment process.
Our robust equity investment process is based on 6 pillars. These pillars help us identify companies that have competitive business dynamics, efficient operational metrics and good management quality leading to sustainability of profits. Our ideal picks are those where these factors are coupled with efficiency in distribution of capital along with fair and attractive valuations.
As of November, Principal Multi Cap Growth Fund’s allocation to large cap stocks accounted for nearly 80% of its total assets. Many market experts believe that given relative valuation comfort for mid and small caps over large caps, it is time to increase allocation to this basket. What is your take on this?
We expect 2020 to be a year of mid and small caps catching up with the large caps that ran up in 2019. There may be pockets of investment opportunities in these segments of market capitalization. It can also be substantiated with the fact that mid and small caps stocks have seen significant correction in the last 12-18 months. Hence, there is value emerging in some of the stocks in this space. In Principal Multi Cap Growth fund, we have started moving into mid and small cap space in a gradual manner.
How should advisors position this fund to their clients?
• Bottom up stock selection
• Sector agnostic and opportunistic.
• Will invest across market capitalisation
• Investments with the intent to play over the fully business cycles of underlying companies
• Suitable for investment horizon over 3-5 years
What is your five-year outlook on equity markets?
While India’s economy has been largely driven by consumption in the last decade, we feel that in the coming decade, it will be a combination of investments and consumption. The likely improvement in GST collections, Direct Benefit Transfers that would help plug the leakages in the subsidy system, and increased FDI flows would provide enough elbowroom for the Government to invest into infrastructure. The recent corporate tax reduction should help encourage meaningful FDI into the country. The good monsoons in the last season should improve farm acreage that in turn should drive farm income, which can have a positive impact on consumption. We believe equity markets should reflect the changing fundamentals and provide excellent investment opportunities over the next 5 years.
