Fund Focus: Principal Emerging Bluechip 1st July 2015
Double digit alpha for 3 years in a row
Dhimant Shah, Sr. Portfolio Manager, Principal Mutual Funds
 

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It's a performance that any portfolio manager would love to showcase: double digit alpha for 3 years in a row (2012-2014), coupled with a quartile 1 / 2 ranking among peers. Dhimant says that in addition to careful stock picking, what has worked is a strict profit booking discipline based on target prices and a nearer term focus on earnings momentum rather than looking too far ahead into the future. How does he propose to continue his winning ways? By shifting focus to a slightly longer term horizon going forward as the economic recovery takes root, and by betting on an urban rather than a rural led recovery.

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WF: Your fund has an enviable track record of consistent alpha generation as well as healthy quartile scores vs peer group. What are the factors driving this consistent performance over the last 3 years?

Dhimant: While we follow a combination of top-down and bottom-up approaches, we have a distinctly greater emphasis on stock picking as a way of generating alpha. We are aware of the benchmark but not driven by it in constructing the portfolio, but we do have prudent sector and stock exposure limits which we strictly adhere to.

You could say that the portfolio construction is driven by our conviction and the best opportunities in the market. There is great emphasis on in-house research and modelling, our own earnings estimates, especially for companies where we think differently from the market. Our preference is for companies with sustainable improvement in growth prospects over the next 2-3 years, having a meaningful position in their respective sectors, scalable business models with a good management track record and trading at attractive valuations. We are happy owning companies that fit these criteria but are under-owned by institutional investors. As a fund house, we are very target-price oriented and while we do take a long-term view of companies, we are happy booking profits at least in part, if our target prices are achieved with no meaningful revision in fundamentals.

WF: What are the key contributors to outperformance in your attribution analysis over the last 18 months, in terms of stocks and sectors?

Dhimant: The investment strategy is to focus on sectors and companies which would be beneficiaries of a significant pick-up in economic growth. The last few years have seen a slightly higher focus on near term (typically next one year) earnings momentum but we believe the time is appropriate to take a slightly strategic and longer view for sectors and companies in order to capture their true earnings potential and hence potential returns.

WF: To what extent do you see Greece, Chinese markets and US rate hikes impacting our stock market?

Dhimant: These are all events which will have some short term impact, resulting in heightened volatility in the markets. Global events have led to synchronicity in markets across geographies but again looking at the longer term picture there are very few markets at global level having a strong growth profile Monsoon seems to have progressed well so far and if it sustains it could do lead to some improvement in the rural economy. While the macros show a distinct improvement, the ground situation still remains challenging in terms of demand outlook. With Government spending likely to go up especially in the Railways and Roads sectors, we do expect a gradual improvement in the ground level demand scenario and hence earnings after the next 2-3 quarters

WF: How is the midcaps space looking now in terms of valuations and earnings momentum?

Dhimant: There is hardly any valuation gap in terms of the large cap and midcap and hence there is not a major difference in the valuations however the midcaps if one observes data for last few quarters have been more resilient in terms of reported numbers

WF: What are the sectors within the midcaps space that you are now overweight on and why?

Dhimant: We are overweight on Auto, Cement, Chemicals, Textiles and Infra space. We felt that with trajectory of interest rates was slated to be down and further the fact that this recovery was possibly tilted towards being urban led.

WF: What have been some of the significant changes to the portfolio that you have made in CY15 and why?

Dhimant: No significant changes done in the portfolio



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