WF: Double digit alpha and top decile performance in CY17YTD - that's an impressive show! What's driving this performance? What does your attribution analysis suggest as the key alpha generators for this calendar year?
Mohan: The performance has been driven by several factors, of course on the back of a very favourable environment for equities globally and locally. The key driver has been the strong outperformance of several stocks in our portfolio, several of them that we have held for the last 2-3 yearsas also the more recent additions. We believe good stock selection is the key to sustainable alpha generation and hence have a bottom-up approach to portfolio construction and this approach has yielded success
Our emphasis on in-house research has helped us identify several stock ideas, especially in the mid and small cap space, well ahead of the market and that has helped performance in a big way. A heartening aspect of the fund's performance is that alpha generators are across a very diverse set of sectors - including auto, auto components, cement, NBFCs, aviation, chemicals, banks, fertilizers.
The fact that we remained underweight for a long time in the IT and Pharma sectors has also aided the performance
Finally, in line with our philosophy of remaining by and large invested in the market without aggressive cash calls has also helped. For us, cash level in the portfolio is a function of available investment opportunities at any time rather than being reflective of our market view; in other words as long as we have good stock ideas we would stay reasonably invested
WF: Which are the sectors and themes you are significantly overweight and why?
Mohan: We believe that the key overweight sectors currently are Auto and auto components, Consumer, Cement, Construction, Chemicals, Pharma and Services. On the back of an improving growth outlook for the Indian economy, we are thus positioned in favour of domestic cyclicals. The improving growth outlook for the world economy has driven a strong rally in the metals space which we were underweight, but our significant exposure to chemicals helped offset it
The rationale for this portfolio is our belief that consumption growth would continue to remain strong, in addition to urban consumption which has been doing well we now expect rural consumption to also do well aiding the growth of the Auto industry. We expect a big push on the housing sector and this would give an impetus to growth in cement demand. We expect the focus on infrastructure to continue especially in the area of road construction and thus remain positive on the sector. The closure of capacities in China and improving global growth momentum would aid strong growth in profitability of the Chemical sector. We have recently added to our position in the Pharma sector as we believe the worst seems to be priced in albeit our focus is on companies with a differentiated portfolio
WF: The pharma sector features in your top 5 now - is that a contra call?
Mohan: Our recent additions in pharma are on two counts - some bottom fishing as we believe the worst seems to be priced in and exposure to some differentiated players. FY18 is a tough year for the sector but is factored into stock prices. We expect growth prospects to improve from FY19. With faster FDA approvals likely going forward, we expect greater competition and hence the need to look at companies building presence in more complex products. We also expect greater focus on companies with presence in the domestic market
WF: How is your fund positioned in terms of market cap sizes and how has this mix evolved in the last couple of years in response to relative valuations between large and midcaps?
Mohan: Around two years ago, large caps were around 60%+ of the portfolio. This went down to around 46%-47% a few months back and has come up to around 54% now. The increase in large cap exposure is largely due to a few bottom up stock ideas where we believe the risk-reward is very favourable.......low downside but reasonable upside and includes companies in Utilities and Consumer Durables
We have avoided chasing momentum and have focused on identifying companies whose earnings potential has not been fully discounted in the stock price. It is admittedly getting a lot more challenging to find new names in the mid and small caps spaces to invest in but it is an enjoyable challenge
WF: Given the fund's strong and consistent track record and its as yetrelatively low share in the ELSS category AuM, what steps are you taking to promote the fund?
Mohan: Basis the feedback from advisors, recently we have introduced Half Yearly Dividend Option in Principal Tax Savings Fund.Also, our equity & Hybrid AUM has witnessed a growth of over 60%* during Oct'16-Oct'17. For the same period, Principal Balanced Fundhas seen some good inflows and it's AUM has grown over 12 times*. So, with the additional option of half-yearly dividend, greater acceptance in markets combined with our enhanced engagement with distributors, we anticipate that Principal Tax Savings Fund too will gain attention and could be suggested by advisors not only to save Tax but also to create wealth for clients in longer term.
*Source: Karvy & Internal calculation
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