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Waiting for Take-off

Principal Mutual Fund was in limelight recently for launching India's first international fund. The fund house is well placed to take on its peers, but it has to put in extra effort to build investor confidence

Principal Mutual Fund has been making lot of news recently for launching India's first international fund--Principal Global Opportunities--and for its aggressive approach towards inorganic growth. The AMC has acquired the schemes of Sun F&C Mutual Fund and has formed new alliances with PNB and Vijaya Bank. These deals may have helped the AMC enlarge its product range to a great extent, but many of its funds have remained average performers. The exceptions are Principal Growth and Principal Income Short-term. While Principal Growth is up 15.76 per cent in ten months of 2004 placing it among the top-5 funds in the category, Principal Income Short-term has beaten its category average in seven of the nine months in 2004. Another notable fund from this AMC is India's only international fund, Principal Global Opportunities, which, despite its short history can make a reasonable claim to being suitable for most equity portfolios.

However, the AMC's acquisitions haven't added any significant value. Unlike the fund industry's other high-profile buyouts like those of Templeton-Pioneer ITI, HDFC-Zurich or Birla-Alliance, Principal acquisition of Sun F&C brought in a mere Rs 500 crore of assets and a handful of mediocre funds. The PNB acquisition brought in just Rs 112 crore of assets. But one good thing about this AMC has been it's quick reaction in streamlining product duplications that arose after acquisitions and new partnerships. There are some more fund duplications that still remain and need to be addressed.

Background
The Fund House was initially set up by IDBI in 1994. In March 2000, Principal Financial Services Inc (USA) became a deemed sponsor by acquiring 50 per cent stake in IDBI-PRINCIPAL Asset Management Company. The Principal Financial Group is the largest provider of 401(k) pension plans in US. This joint venture broke-off after three years as Principal Financial Group bought out IDBI's entire 50 per cent stake in June 2003 and subsequently, the AMC name was changed to Principal AMC. In the same year, it acquired schemes of Sun F&C Mutual Fund and in May 2004, PNB and Vijaya Bank became the equity shareholders of the AMC.

Performance
The AMC has five equity funds of which Principal Growth has rode the volatile 2004 exceptionally well. Its year-to-date return of 15.76 per cent places it among the top-5 funds in the category. This fund has a judicious mix of large- and mid-cap stocks. Another equity fund, Principal Resurgent India Equity, which is an opportunist fund has remained among the top quartile funds in the category in the past three calendar years. However, the performance of Principal Equity that largely sticks to large-caps, is not up to the mark. The fund is down 1.3 per cent in 2004. Historically too, except for 2002, it has always remained in the bottom half of the category.

On the debt side, the fund has a wide variety. While Principal Income is a sober fund with low volatility, average risk and above average return, Principal PNB Debt is just the opposite. It has a high affinity towards gilts hence making it a high-risk and highly volatile offering. Another income fund from this fund house--Principal Money Value Bond is akin to Principal Income and has a low asset base (Rs 34 crore). Interestingly both these funds' expense is on the higher side in the category, hence, merging the two funds could be a better option as it will bring down expense.

Among short-term funds, Principal Income Short-term is a good fund for its low divergence in best and worst returns. But its expense ratio of 1 per cent vis-à-vis peers' average of 0.89 per cent is slightly a high price to pay for a low-impact short-term fund. The AMC's cash fund, Principal Cash Management Liquid has been an average performer in the category.

Among hybrid funds, Principal Balanced has hardly provided satisfactory performance. Despite having aggressively invested in equities (average 70 per cent), all its trailing returns lie in the middle of the category. Principal MIP, on the other hand, has been a bit cautiously managed. It's equity exposure have never crossed 9 per cent, hence it landed in the bottom half through 2003 but its 10-month return in 2004 is in line with that of the category average.

New Product Launches
The AMC has pioneered the international fund investing in India. Launched in March 2004, Principal Global opportunities fund invests in stocks of foreign companies. In this short stint, it has been able to provide the benefit of international diversification. For instance, in May 2004 when average equity fund lost 15 per cent, Principal Global Opportunities Fund gained 1.7 per cent. Recently, the fund house launched a dividend yield fund that would invest at least 65 per cent of its portfolio in high dividend yielding stocks. A high dividend yielding stock is expected to have a lower downside as well as a lower upside. This is the second such fund in India after Birla Dividend Yield Plus (launched in February 2003). The AMC is also the first one to introduce aggressive MIP called Principal MIP Plus (in December 2003) that has a higher mandate of investing in equities (up to 20 per cent).Last month, the AMC launched a floating rate fund.

Going Ahead
Overall, the fund house is well placed to take on its peers, but it has to put in extra effort to build investor confidence more.