Principal Emerging Bluechip delivered 147 per cent last year. How crucial was the timing of the launch in contributing to such returns?
We did enter when the market was low, but timing was a small contributor to the performance. Initially, when we launched and had to deploy cash, we bought some large cap stocks. Gradually we added mid caps. Between January and March 2009, large caps did better than mid caps. From March onwards, mid caps began to rally and by then we were invested in mid caps.
So it was market cap preference that helped?
What actually worked in our favour was that we were true to label. Some fund managers were wary of mid caps. Hence a lot of funds in the industry held some sort of a large cap tilt, despite the mandate of being a mid cap fund. We stuck to our mid cap orientation, which means at least 65 per cent of the portfolio is in mid caps at all periods of time and at least 5 per cent in small caps. So at any point of time, 70 per cent of the portfolio of Emerging Bluechip will be in mid- and small-cap stocks. So when the market began to rally, our true-to-label positioning helped.
Were there any specific sectors that worked in your favour?
No. We had a diversified bet across sectors. We did not have any strong individual sector calls.
What specifically about your portfolio helped deliver such returns?
Good stock selection helped.
But importantly, good portfolio construction played the major role. A number of factors go into this. The risk parameters laid down. The maximum exposure permitted to a stock or sector. The amount of diversification. The tracking of the benchmark. Even if you seriously believe in a stock and it does not do too well, it must not hurt your portfolio in a serious manner. So even if I like a stock I cannot make it 9 per cent of the portfolio if the benchmark is, say, 3 per cent. Another point I would like to make is the importance of sticking to mandate, which I believe we do. You have to do what you state you will do. You cannot keep changing the complexion of the portfolio to suit the market environment. So if large caps are doing well, I cannot tilt my mid cap portfolio towards larger stocks and vice versa. Our cash allocation is generally around 4-5 per cent and we usually do not go more than 10 per cent in cash. That is why we suffered in 2008, because we did not go heavy into cash. But we were rewarded in 2009 because when the market picked up we were fully invested.
What was the reason for mid caps rallying to such an extent last year? Do you see it continuing to rise?
Last year there was a significant valuation differential between large- and mid-caps. And the differentiation, though narrowed now, still exists in favour of mid caps. I do feel mid caps, as a category, would do better than large caps. But there is still value in some large cap companies. There are some good options at 12x-13x FY11 forward earning multiples. So valuations are still not all against you. But the key event is going to be the macro situation.
What specific parameter do you use to select a mid cap, as against a large cap?
Generally, the stock analysis of both will be the same. But in the case of a mid cap company, a lot more time is spent looking at the capability and quality of management. Scalability too is an issue. A large cap is much more tested, tried and adequately researched. Mid caps comprise of a fairly large range. In a number of mid caps we see a good business plan, good management and a great business. It's just that the company is much smaller. But the size does not translate into them being weaker in their space. A number of mid caps are leaders in their own space, though they may not be large. It is not a question of quality, but of size.
Financials has been your highest sector bet for a while. But allocation has fallen from 20 per cent (August 2009) to 13 per cent (January 2010). Are you losing faith in that sector?
We do believe that this sector is part of the India growth story going forward. But in the public sector bank space, we have a slight concern with NPAs going forward and bond yields rising slightly. As a fund house, we have gravitated more towards private sector banks. Even in our large cap funds, we are slightly, but not substantially, underweight in Financials.
The Technology exposure is low in this fund. Are there not sufficient opportunities in the mid cap space?
Not really. Of late, there have been downgrades in the mid cap Technology space. The smaller companies are not that suited to go through challenging times, the larger ones can deal with it much better. So in our large cap funds, we do have large cap names in this space. But we are not overweight, just neutral.
Neither do you seem to be bullish on Healthcare.
In the large cap fund we are overweight on Healthcare, but not in the mid cap funds. In this space, we mostly play the Indian companies, not the multinationals.
The fund is small at around Rs 200 crore, why do you have so many stocks?
We have around 55 stocks in this portfolio. In a large cap fund I would probably hold under 40 stocks. But in a mid cap fund one needs to be more diversified simply because the stocks are inherently more volatile. A concentrated mid cap portfolio would be a volatile one, something we do not want.
Would a large size be a hindrance in managing a mid cap fund?
Yes. In a large mid cap fund the options available to buy into stocks gets very constrained. Because you have to have a certain exposure to a stock for it to impact the performance. If it's a large fund it does pose a problem. But that is only at a particular level. So a Rs 1,000 crore mid cap fund is as good as a Rs 200 crore mid cap fund.
Why was the cash position in Emerging Bluechip high over December 2009 and January 2010?
We are in the process of lowering it. We got a lot of inflows and had to deploy that money. It's not as easy deploying money in mid cap stocks as it is in large cap stocks. A lot more research is needed.
Principal Mutual Fund emphasizes that its schemes must closely monitor the benchmark. Is it not limiting being restricted to the benchmark?
It's a part of risk control. This is what brings about consistency and lowers volatility. But the fund manager does have ample leeway. You can be overweight or underweight on the stock.
If a stock is not in the benchmark but I choose to invest in it, I can go up to 3 per cent in that stock. If a stock is in the benchmark with a 10 per cent weightage, and I want to be underweight, I will hold around 5 per cent in my portfolio. The maximum exposure I can take is 10 per cent, which is the SEBI limit.
NPA: Non Performing Assets / SEBI: Securities & Exchange Board of India
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