Principal Emerging Blue-chip Fund

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Principal Emerging Blue-chip

Principal Emerging Blue-chip is a mid-cap growth fund that was started in October 2008. The fund has so far garnered a corpus of Rs 293.12 crore. The fund aims to be a consistent quartile two performer. (This doesn't necessarily imply lack of ambition – aiming for quartile one performance creates pressures that can lead to mistakes). The fund adheres to growth-at-reasonable-price (GARP) style of investing, and prefers stocks that offer a margin of safety.

Fund's performance

			YTD		1-Year		3-Years		Since Inception
Principal Emerging Blue-chip		0.62		37.11		7.56		33.72
CNX Midcap		-1.66		17.79		5.10		21.61

All figures in % as on January 31, 2013; Returns above one-year in CAGR terms

The fund has done well this year: year-to-date it is up 0.62 per cent while its benchmark, the CNX Midcap Index, is down 1.66 per cent. It has also done better than its benchmark in terms of returns in the last one- and three-year periods. Return since inception has been very high.

			2009		2010		2011		2012
Principal Emerging Blue-chip		141.96		19.74		-34.73		55.03
CNX Midcap		94.85		19.16		-30.99		39.16

All figures in %

The fund has beaten its benchmark in each of the last four calendar years except 2011.

Portfolio characteristics

Number of equity holdings. Currently the fund holds 56 stocks in its portfolio, which is higher than the median of 41 for the diversified-equity category.

In its early days, the fund had a more concentrated portfolio. In January 2009, for instance, it held only 25 stocks. Since June 2009, when its equity count first crossed 40, it has become more diversified. In 2012 it held an average of 58 stocks in its portfolio.

Sector concentration. The fund's level of concentration in the top three, five and 10 sectors in its portfolio is lower than the median for the peer group.

			Top 3		Top 5		Top 10
Principal Emerging Blue-chip		30.94		42.88		61.78
Category Median		34.24		47.59		68.49

Company concentration. Its concentration in top three, five and 10 companies in its portfolio is lower than the median for the category.

			Top 3		Top 5		Top 10
Principal Emerging Blue-chip		12.06		18.47		32.10
Category Median		18.41		28.03		45.52

Thus, the fund clearly holds a well-diversified portfolio.

Turnover ratio. The fund manager has reduced the turnover ratio to 58 per cent, which is lower than the category median of 67 per cent. During our previous review it was 102 per cent, which was higher than the median of 73.5 per cent for the peer group.

Expense ratio. The fund's expense ratio is 2.34 per cent, marginally lower than the median of 2.36 for its peer group.

Risk measures. The fund's risk level, measured in terms of standard deviation and beta over the last three years, is lower compared to the category median.

			Standard Deviation		Beta
Principal Emerging Blue-chip		0.9437		0.7380
Category Median		0.9447		0.8078

Risk-adjusted returns. On the basis of Sharpe Ratio (measured over last three years) the fund has a higher risk-adjusted return than the category median. However, the risk-adjusted return is marginally lower (or almost at par) in terms of Treynor ratio over the same period.

			Sharpe		Treynor
Principal Emerging Blue-chip		0.0311		0.0233
Category Median		0.0283		0.0237

Cash Allocation. Currently the fund has a negligible allocation to cash of – 0.02 per cent. The average has been 0.78 per cent in 2012, 2.76 per cent in 2011 and 8.20 per cent in 2010. So the cash level has gradually reduced.

Portfolio strategy

In 2012 the fund was a stellar performer—it gave the second-best return within the diversified-equity category. Against the CNX Midcap's return of 39.16 per cent, it gave a return of 55.03 per cent. The outperformance has been substantial.

The fund's allocation to mid caps averaged 32.7 per cent. It was gradually reduced from 38 per cent in January to 25 per cent in December. The large cap allocation averaged 65.13 per cent. The allocation to large caps was increased from 59 per cent in January to 73 per cent in December. Exposure to small caps averaged 1.46 per cent.

	Sector		Feb-12 (%)		Jan-13 (%)		Raised/lowered allocation (%age points)
Bank - Private		10.63		14.71		4.08
Auto Ancillary		2.54		5.95		3.41
Diversified		1.05		3.40		2.35
Consumer Food		4.82		6.32		1.50
Tyres & Allied		2.27		2.86		0.59
Cement & Construction Materials		5.16		5.58		0.42
Pharmaceuticals & Drugs		9.56		9.91		0.35
Household & Personal Products		3.92		3.82		-0.10
Bank - Public		4.11		3.24		-0.87
IT - Software		7.10		5.99		-1.11

Among the top sectors the fund increased its allocation to private banks, auto ancillary, diversified and so on (see table above). It lowered its allocation to IT-software, public banks and household and personal products.

Fund vs. Benchmark – January 2013

	Sector		Fund (%)		CNX Midcap (%)		Over/under allocation (%age points)
Bank – Private		14.71		5.48		9.23
Consumer Food		6.32		2.01		4.31
Auto Ancillary		5.95		1.76		4.19
Cement & Construction Materials		5.58		3.57		2.01
Tyres & Allied		2.86		1.83		1.03
IT - Software		5.99		5.28		0.71
Diversified		3.40		2.99		0.41
Pharmaceuticals & Drugs		9.91		11.09		-1.18
Household & Personal Products		3.82		5.78		-1.96
Bank – Public		3.24		8.67		-5.43

Figures are for January 2013

Currently the fund is overweight vis-a-vis its benchmark on private banks, consumer food, auto ancillary, cement and construction and so on. It is underweight its benchmark on public banks, household and personal products and pharmaceuticals.

	Company		Feb-12 (%)		Jan-13 (%)		Raised/lowered allocation (%age points)
Amara Raja Batteries Ltd.		2.02		4.39		2.37
ICICI Bank Ltd.		2.16		3.23		1.07
Jammu & Kashmir Bank Ltd.		1.96		3.01		1.05
ING Vysya Bank Ltd.		2.25		3.18		0.93
Shree Cement Ltd.		2.73		3.53		0.80
Federal Bank Ltd.		1.99		2.65		0.66
Apollo Tyres Ltd.		2.27		2.86		0.59
DiviS Laboratories Ltd.		2.05		2.47		0.42
Yes Bank Ltd.		2.28		2.64		0.36
Glaxosmithkline Consumer Healthcare Ltd.		3.78		4.14		0.36

The fund increased its allocation to all its top 10 holdings, as mentioned above.

Fund manager

Dhimant Shah has been managing this fund since June 2011. He has surely given an impressive performance in 2012. The fund manager had increased large-cap exposure by December. As a result, the fund fell less than many other mid-cap funds in January when mid-caps took a beating.

Conclusion

The fund has an impressive track record and is recommended for the mid-cap portion of your portfolio.

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