A decade long journey of Principal Emerging Bluechip Fund

Principal Emerging Bluechip Fund has recently crossed Rs. 2,000 crore. Can you share its decade long journey in the equity markets with our readers?

The journey of Principal Emerging Bluechip Fund has been a rewarding one so far. This fund was launched amid the global economic meltdown in November 2008. From its launch till date, this fund has experienced almost a decade of bull and bear phases in the Indian markets including events like US sub-prime crisis, brexit, sharp fall and rise in commodity prices, the slowdown in China, the move from easy to tight liquidity conditions globally, domestic reforms, demonetization, GST implementation to name a few. This fund has delivered performance through these events and cycles. As can be seen, the fund has marginally outperformed the benchmark during the bear phases and has substantially beaten the benchmark during the upward phases in the market.

The following table shows the fund’s performance vis-à-vis NIFTY Large Midcap 250 TRI across the peaks and troughs made by the benchmark since inception.

 Past performance may or may not be sustained in future.

What is you near term outlook on equity markets?

Globally, the concerns uppermost in minds of investors are about the potential fallout of trade wars, the potential slowdown in China, issues in the Eurozone around Italy, potential refinancing needs of the emerging markets. These have impacted flows to EMs as the risk appetite globally has been low this year. India may be better placed in a situation of rising trade friction due to its slower growth in exports vis-à-vis the growth in global trade in the past few years. Therefore, the impact of trade friction may be somewhat muted. Though India stands out relatively better in this environment, it won’t be immune to global fund flow volatility.

Domestically, in the past 3-4 years, consolidated earnings for the broader markets are affected negatively by poor performance in the energy, metals, IT and financials sectors; each having disappointed at various points in time. Currently, these major sectors all seem to be performing well. Looking ahead, the wide divergence in the performance of large caps and mid-caps this year is expected to reduce and they may at least move in the same direction; though risk aversion would mean that large cap outperformance continues in the near future.

On the current valuation front, the Indian market is at a premium to other emerging markets and its own historical valuations. Moreover, the big macro concern for India is rising oil prices and the higher current account deficit.

India has three key state elections in 2018 followed by the general elections in mid-2019. Elections are events which will keep noise levels high and we expect a more than average volatility till the election cycle is over. A sharp correction in the volatility should provide a good entry point in stocks where earnings are expected to be on track and whose valuations become more attractive.

What have been the performance drivers for the scheme?

The major contributor to performance has been the industrial manufacturing sector. The weight of this sector in the benchmark is close to 4% whereas we have maintained an overweight stance vis-à-vis benchmark. Chemicals is yet another sector where our overweight stance have helped us generate alpha. The heavyweight sectors in the benchmark are financial services and energy. We have had a substantial under-exposure to these sectors which helped us in performance.

How does the scheme invest?

The scheme focuses on bottom up stock selection, disciplined portfolio construction and adequate diversification as key pillars. We prefer companies which are showing earnings growth, have attractive relative valuations, are careful about capital allocation and are run by a competent and transparent management team. This is an actively managed fund and the portfolio is monitored closely for divergence in the fundamentals of the company from expectations given that the risk factors tend to be higher in the case of a mid-cap stock.

What is the sectoral preference of the fund manager?

As said above, the fund essentially follows a bottom up stock selection methodology rather than a thematic approach to investing.  However, compared to its benchmark, the NIFTY Large and Midcap 250 Index, the fund’s top five overweight investments are sectors of industrial manufacturing, chemicals, cement & cement products, automobiles and textiles.

As on September end, while the portfolio is well diversified, the top 5 sectors contribute to over 42% of allocation to the fund.

Recently, the markets have been volatile. Has the scheme made any changes to its portfolio to withstand the volatility?

We have tested the assumptions underlying the earnings trajectory for the companies held in our portfolios especially in the mid and small cap space. Wherever we felt comfortable with the expected earnings growth, we have held on to such companies. In addition to earnings, the comfort was also sought in other factors like quality of management and other fundamentals. In other cases where we felt that the earnings are expected to face the heat in coming quarters, we have let go of such names. Our portfolio management has always been active and dynamic. In current situation we have been more vigilant on these factors.