What is the rationale for launching Principal Large Cap Fund? Why do you think this is a good time to launch a diversified large cap fund?
The large cap companies (the top 100 companies by market cap) make up almost 67% of the total market cap of listed companies in India. These companies represent a large swathe of the economy. Investing in the large cap segment of the economy enables investors to participate in the potential growth drivers of the Indian economy.
Additionally, large cap funds are a significant segment of the market and they are the largest sub category of equity mutual funds in India. These funds tend to be one of the integral parts of the equity allocation of equity mutual fund investors. The Principal Large Cap Fund would serve to complete the suite of open-ended equity funds from principal India.
The rally in the equity markets in recent months has not been broad based and there are investment opportunities available across the investment universe. We believe it is a good time to invest in large companies as these are typically the market leaders and drivers of growth & innovation in the sectors that they operate
How is Principal Large Cap Fund different from other existing funds in the category? Could you please explain the Portfolio Construction strategy?
Principal Large Cap Fund is the first Indian mutual fund scheme that would be investing in foreign companies. Currently, around 15% of the portfolio would be invested in US large cap companies. We seek to leverage Principal’s global resources and experiences in enabling US equities with access to advice and research from the US based Principal Global Investors (PGI) team.
The Indian portfolio construction and stock selection will be based on the bottom up stock picking approach combined with our 6 pillars of investment framework. The picture below depicts our investment approach for the Principal Large Cap Fund.
The investment strategy may change from time to time without any notice and shall be in accordance with the strategy as mentioned in the Scheme Information Document of the scheme.
Why has Principal Large Cap Fund decided to take exposure to the US stock market? What led you to decide to add global large cap to Principal Large Cap Fund?
The Principal Large Cap Fund would be investing in US large cap companies. These companies are typically market leaders and the businesses have a global footprint. Additionally, these companies operate in parts of the economy where the Indian consumer is present but the Indian investor is absent – companies in areas such as e-commerce, Information Technology products, select healthcare services, etc.
The addition of US Large cap companies to the portfolio provides the following additional benefits:
o Enhanced returns
o Lower volatility
o Benefit from potential rupee depreciation
Since the US large cap space is a very broad universe, how will you identify the best stocks? what will be your portfolio construction strategy for US portion?
The portfolio seeks to invest in US companies with a market cap higher than USD 50 Billion. The portfolio would be supported with research and advice by the US based investment team of Principal Global Equities, one of the investment boutiques of Principal Global Investors.
The investment approach of the Principal Global Equities team is summarized as follows:
After correcting sharply in March, Nifty 50 and Sensex have witnessed a faster-than-expected recovery. Is the current rally sustainable or is a correction around the corner?
The recent pull back in the market after the correction in March has taken everyone by surprise. However, we believe that there could be still good opportunities in many companies across market capitalizations and across sectors particularly for long term investors. Further, there could always be a case for investing in companies that are expected to do better irrespective of market conditions.
Both Indian and US Markets are trading at expensive valuations. Do you think this a good time to invest in large caps?
It is true that the markets are expensive at an overall level. However, there are significant parts of the economy – both in India and the US, that provide attractive opportunities for investments for equity investors. A stock selection approach based on a robust and consistent investment and portfolio construction process would help in the discovery of investment opportunities in both the markets.
Many experts believe that it will be difficult for fund managers to generate Alpha in large cap funds. Your comment.
In recent years, typically since 2018, generally the returns from equities have been polarized with few of the large cap companies generating better returns than their other large cap peers. The rally in stock prices have been largely limited to only select few names. This is primarily because India has been in the midst of an economic slowdown for the past few years and only a few sectors are seeing some amount of growth. As the economy recovers and there is a broader recovery, a lot of opportunities especially within the manufacturing space that could potentially open up.
Further, we believe that we do not invest in markets but invest in companies. As such, there could always be opportunities for fund managers to generate alpha through a superior investment and stock selection process.
In the large cap fund category, most funds have delivered single-digit annual returns over the past 5 and 10 years with a lot of volatility. What kind of returns should investors expect from this fund in medium to long term?
The returns in the last few years have been impacted by the volatility in markets due to the general economic slowdown which was further accentuated by the impact of the Corona related lockdowns. The markets tend to lead the developments in the broader economy. We believe that the long-term growth trajectory of the Indian economy remains intact and the markets would reflect this growth in the longer term. However, in the short term the market may continue to remain volatile. Investors should follow their investment plans and consult their investment advisors.
Which are the sectors that you are overweight and underweight in the covid-19 era?
We have been quite positive on the agri related businesses, speciality chemicals and the consumer discretionary space. The Specialty Chemical business in India has been gaining momentum over the past few years and many companies have developed significant knowledge and skill surrounding complex chemistry. Further, they have managed to secure long term contracts with global agriculture and pharma players thus we expect some of the niche players in this segment to attract significant investments in creating global scale capacities over the next 3 – 5 years.
The Infrastructure sector is expected to take a slightly longer time to recover from the slow down. In the current scenario, infrastructure spending, both government and private, is expected to remain muted given the severe strain on the government’s fiscal situation post Covid-19. While existing projects may resume but one can expect significant delay in payments and an elongated working capital cycle.
Why should distributors recommend Principal Large Cap Fund to their clients?
A large cap fund is typically the core of an investor’s equity portfolio. These funds are invested in the leading companies of the economy that generally provide potentially stable and sustainable growth. The Principal Large Cap Fund would be a portfolio that combines the Indian and US large cap companies. The fund would invest in market leading robust businesses in Indian the US. A portfolio of Indian and US companies provides the multi-pronged benefits of diversification to the Indian investors – consistent returns, lower volatility and a potential hedge against currency depreciation. The distributors and business partners are advised to recommend the Principal Large Cap Fund based on a calibrated risk-taking abilities of their investors and also the long-term financial needs and goals.
Could you brief on various initiatives you have taken to support distributors to market this offering to their customers?
Principal Asset Management has a comprehensive and innovative marketing and distribution strategy for this fund. We are engaging with all investment advisors and distributors through multiple channel, for a and technologies. Additionally, support – both digital and physical, is being provided to all the distributors as we take this fund to the market.
