A look at the 10 year track record of Principal Growth Fund showcases two clear phases - the first 7 years of an indifferent performance followed by a remarkable turnaround in 2012 and importantly, sustaining this turnaround ever since then. What's different now about Principal Growth Fund that has enabled it to climb up the league tables and stay there for 3 years in a row? P V K Mohan shares his perspectives on what's changed in the fund and also his views on sectors likely to outperform going forward. Domestic cyclicals is a key theme he believes will lead this market from hereon.

What do percentiles and their colours signify?

Fund performance is typically measured against benchmark (alpha) and against competition. Performance versus competition is measured through percentile scores - ie, what percentage of funds in the same category did this fund beat in the particular period?

If a fund's rank in a year was 6/25 it means that it stood 6th among a total of 25 funds in that category, in that period. This means 5 funds did better than this fund. In percentile terms, it stood at the 80th percentile - which means 20% of funds did better than this fund, in that particular period. If, in the next year, its rank was 11/26, it means 10 other funds out of a universe of 26 did better than this fund - or 38% of funds did better than this one. Its percentile score is therefore 62% - which signifies it beat 62% of competition.

Most fund managers aim to be in the top quartile (75 percentile or higher) while second quartile is also an acceptable outcome (beating 50 to 75% of competition). What is generally not acceptable is to be in the 3rd or 4th quartiles (beating less than 50% of competition). Accordingly, we have given colour codes aligned with how fund houses see their own percentile scores. Green colour signifies top quartile (percentile score of 75 and above), yellow or amber signifies second quartile (percentile scores of 50 to 74) and red signifies 3rd and 4th quartile performance. A simple visual inspection of colour codes can thus give you an idea of how often this fund has been in the top half of the table and how often it slips to the bottom half. A great fund performance is one which has only greens and yellows and no reds - admittedly a tall ask!

WF : Is your Growth Fund to be seen as a multi cap fund or a go anywhere fund? What is the current mix across cap sizes and how has this changed in the last 12 months? Going forward do you expect mid caps to continue outperforming large caps or is it time for the baton to change hands again?

P V K Mohan : The Principal Growth Fund is a diversified fund having the BSE 200 as its benchmark index. The Fund invests in stocks with a minimum market capitalization above that of the lowest in the BSE 200 index, so in that sense it is a Multi-cap Fund. It however does not invest in small-cap stocks. Currently, the market cap mix is more tilted towards large cap stocks (over 90%). While there is no specific target mix, mid-caps tend to account for 10-15% of the portfolio. Over a 3-year period, we expect returns from good quality mid-caps to be higher than that from large-caps

WF : There is a visible and sustained turnaround in fund performance since 2012, as seen from the alpha generation as well as the percentile scores above. What are the factors that you think have led to this turnaround? What is different now, compared to the pre-2012 period?

P V K Mohan : The improvement in performance from 2012 was due to several factors

1. Despite the underperformance, we held on to our positions in stocks where our conviction on fundamentals remained strong. Gradually, as the market began to appreciate the improving fundamentals and attractive valuations, the performance of these stocks improved significantly

2. The ability to identify good bottom-up opportunities, especially in the mid-cap space and build meaningful positions

3. Staying reasonably invested in the markets in the stocks we like till the story plays out completely, notwithstanding the challenging macro environment

4. Slightly more active management of the portfolio as compared to the earlier buy and hold, low churn approach

WF : The US dollar is making big moves lately. What is your house view on the US dollar and what implications could this have on FII inflows and overall on Indian markets?

P V K Mohan : The dollar has been strengthening against most currencies given the improvement in the US economy and prospects of rising interest rates there. There may be short term hiccups or volatility in FII flows but we believe India is structurally well placed to attract strong FII inflows given the good growth prospects of the economy and the likely improvement in macroeconomic fundamentals and corporate earnings growth

WF : What is your overall call on the market, now that it has perhaps discounted the election euphoria and now that expectations of "acche din" are baked into share prices? What do you see as drivers for the markets going forward?

P V K Mohan : We are very positive on the market over the next 3 years and expect Indian equity markets to give returns of 15%-20% p.a. In the short term, given the strong rally, we could take a breather and await more concrete initiatives from the Government to prime growth in the economy. Besides this , the key drivers here on would be implementation of key reforms and growth initiatives -initiatives to lower subsidies and have credible path to meeting fiscal deficit targets, GST , steps to attract FDI (eg Insurance limit hike) etc.

WF : Which sectors look the most promising going forward? Which sectors are your key overweights now in the Growth Fund?

P V K Mohan : We are overweight domestic cyclical stocks such as Auto, Cement, IT, Construction, Industrials, etc. While returns from IT, Pharma would be positive, we expect domestic cyclicals to outperform

WF : Which sectors and themes do you see leading this bull market?

P V K Mohan : The central theme would be Indian economy getting back to significantly higher growth trajectory and hence earnings growth getting back to 18%-20% p.a, leading to markets getting rerated. The best placed sectors would be the domestic cyclicals

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