What is your view on the current market valuation? What are the perceived market opportunities and market risks for the near future?
Prices, in general, have surged over the last year in the markets from the lows of March 2020 but we believe investment opportunities continue to be available in individual companies. The economy has shown resilience and is expected to recover in FY22 aided by the fiscal and monetary support, roll out of the Covid vaccine and the return of economic activity to pre-pandemic levels, sans a few sectors. From a near term perspective, valuations may seem somewhat stretched esp. during the ongoing wave of the pandemic and its potential economic impact in the first half of FY22. However, from the perspective of 3-5 years, there are investment opportunities across market caps. If you consider the expected improvement in economic growth along with margin expansion, the valuations do not appear to be very stretched. Having said that, volatility in the near term cannot be ruled out.
The fund has recently outperformed the benchmark index. What are the key factors that contributed to this performance?
We follow bottom-up stock selection process based on our six pillars investment framework which helped us to reduce the error of commission. Besides, given the conservative nature of the fund, we have been wary to add risk to the portfolio. During the last year, markets have been extremely volatile, the focus on risk control measures aided the performance. Maintaining a conservative and well-diversified equity allocation across sectors and market caps also helped. Over the last year, we have been maintaining unhedged equity closer to the higher end of the allocation range which helped the overall portfolio performance.
Who are the ideal investors for equity savings fund? Why should MFDs consider integrating equity savings fund in their clients’ portfolio?
The Equity Savings Fund is suitable for investors with a low to moderate risk appetite seeking to generate income and capital appreciation from their portfolios over a period of time. This product is suitable for investors seeking to participate in the equity markets but are wary of the volatility in equity markets. The portfolio is designed to provide participation in equity markets, comparatively lower volatility and also generate income from the debt allocation.
What is the asset allocation strategy followed? Why do you think this strategy gives the fund a competitive edge?
Broadly, the fund allocates 65% to 90% of its assets to equity and equity-related instruments of which, the allocation to net equities is between 15% to 50% of the fund’s net assets. For detailed asset allocation pattern, please refer to the scheme information document for Principal Equity Savings Fund.
The Principal Equity Savings Fund has 3 components – unhedged equity, debt and arbitrage. Unhedged equity provides the potential for capital appreciation in the portfolio while arbitrage and debt allocation provide regular income generation and also reduce volatility in the portfolio.
How frequently is the asset allocation strategy reviewed? Seeing the uncertainties around the second wave of COVID-19 and the dynamism of the market do you feel the need of revising the asset allocation?
The net equity allocation is monitored on a daily basis. We do not envisage frequent changes to the asset allocation as described in the SID (Scheme Information Document).
What is the underlying formula for minimizing the downside risk of the fund?
The asset allocation of the Equity Savings Fund provides for net (unhedged) equity exposure in the range of 15% to 50%. The balance is invested in arbitrage positions and debt instruments. The hedged equity and debt allocation is invested with a view to help generate income and reduce the volatility of the overall portfolio. Even within the unhedged equity portion, we aim to maintain a well-diversified portfolio to reduce risk. Further, given the conservative nature of the investors in the fund, the equity allocation has a higher allocation towards the large cap companies.
What makes Principal Equity Savings Fund different from the other equity savings funds in the market?
The equity portion of the fund is managed through our robust investment and stock selection process. We follow a bottom-up approach to stock selection and aim to maintain an adequately diversified portfolio with exposure across sectors. The stocks are selected based on their robust business model, competitive moats, sustainable earnings growth, superior quality of growth and demonstrated management pedigree with earnings expected to grow better than other companies in their sector.
The debt portion of the fund comprises high-quality fixed income instruments and the duration is actively managed. We generally construct our debt portfolio keeping in mind the overall interest rate view without sacrificing the credit quality. We actively trade across the curve up to ten years to generate alpha over and above the income generated through two to five year AAA rated corporate bonds which we believe are currently being traded at attractive carry. We have consciously avoided exposure to certain sectors like NBFCs/Perpetual bonds and have instead remained invested in the manufacturing sector like cement and quasi-sovereign bonds given the certainty of cash flow and sovereign backing respectively
