Principal Emerging Bluechip Fund Review

Principal Emerging Bluechip Fund

Fund Manager: Mr Ravi Gopalakrishnan

Category: Large & Mid cap

Date of Inception: 12 December 2008

Benchmark: S&P BSE 200 India TR INR

Principal Emerging Bluechip Fund is one of the oldest mutual fund schemes in India with an impressive track record to back its longevity with performance.

It was initially launched as a Mid cap fund but was later converted to a Large & Mid cap fund after SEBI’s new rules with regards to classification of mutual fund categories kicked in.

Categorization of companies

Large Cap: 1^st-100^th company in terms of full market capitalization.

Mid Cap: 101^st -250^th company in terms of full market capitalization.

Small Cap: 251^st company onwards in terms of full market capitalization.

Fund Overview

Keeping in line with SEBI rules regarding classification, principal emerging bluechip fund has to invest a minimum of 35% each into large cap stocks and mid cap stocks.
This strategy was of course put into place after the new rules laid down by SEBI but prior to that the fund was a Mid Cap fund investing primarily in mid cap stocks.
The Fund was launched during the latter half of 2008 amidst the financial crisis that had engulfed the global economy.
The Fund is better suited for investors with a long-term view who are ready to ride out volatility in the short term and can therefore expect the fruits of their patience in the long term.
Principal Emerging Bluechip fund is currently managed by Ravi Gopalakrishnan who has been at the helm since October 2019.

Investment strategy

Since the fund falls into the Large and Mid-Cap category of mutual funds, rules state that it needs to invest 35% minimum in both large cap and mid cap stocks.
The remaining 30% is at the discretion of the Fund Manager who may allocate it as and where he feels is appropriate to.
Principal Emerging Bluechip Fund has historically been one of the most actively managed funds, meaning the portfolio is accordingly manoeuvred to stay aligned with the fund goals.

This can be better understood from the diagrams below:

Observations:

If you notice in all the 3 diagrams above, the allocation in large cap stocks, mid cap stocks and small cap stocks varies for the three consecutive months.
So as can be inferred, the allocation is neither too rigid nor too flexible but rather there is scope for movement as and when the need arises.
To put it simply, the fund has a healthy set of core stocks that forms the majority of the portfolio whereas at the same time leaving enough scope to take advantage of opportunities as and when they arise.
This is a very important point to take note since the markets from time to time does throw up enough opportunities when even fundamentally strong companies get available at attractive valuations.
At the same time, it is imperative to leave enough space to enter and exit with changing business models, management, balance sheet, etc.

Additional reading: Click Here to read our complete review of Kotak Standard Multicap mutual fund

Principal Emerging Bluechip Fund Portfolio

Number of Stocks	64

Top 10 Stocks %	30.73

Top 3 Sectors %	45.67

As on 29^th February 2020

As can be seen by the number of stocks the portfolio holds, Principal Emerging Bluechip fund is currently well diversified which further enhances the earlier point of making use of opportunities as and when they arise.

The top 10 stocks constitute 30% of the overall portfolio meaning there is enough diversification even within the concentrated bets.

Equity Allocation

Large Cap Stocks	43.66%

Mid Cap Stocks	47.33%

Small Cap Stocks	09.01%

As on 29^th February 2020

As previously mentioned, Principal Emerging Bluechip Fund is a Large & Mid Cap Fund thereby requiring a minimum investment of 35% each into large cap & mid cap stocks with the rest solely at the discretion of the fund manager.

The Fund manager here has taken a higher allocation to mid-cap stocks as compared to large stocks along with certain allocation to small cap stocks.

The higher allocation to mid-cap stocks can be explained with attractive valuations the fund manager believes to be available as and when he sees fit for the portfolio.

Top 5 Sector & Holdings

Sector	Holdings
Financial	HDFC Bank

Services	ICICI Bank

Healthcare	Reliance Industries

Energy	Kotak Mahindra Bank

FMCG	Bajaj Finance

As on 29^th February 2020

What is interesting to note here is that comparatively speaking, the fund had a higher exposure to the Healthcare sector as on 29^th February 2020.

Drugs & Pharmaceutical stocks performed much better during the market correction of March 2020. This again adds weight to the earlier discussion about having enough flexibility to enter and exit business as and when opportunities arise.

This by no means should be seen as an attempt to time the market but is rather proof that mere investing in not sufficient, what is needed is constant surveying of the portfolio both from the fund managers point of view as well as the investor.

Performance

As on 30th March 2020

Principal emerging bluechip fund has consistently beaten the benchmark over 1 year, 3 years, 5 years and 10 years.
It is consistently in the top 2 for the same period.
Keep in mind that it is not possible for a fund to consistently to beat the benchmarks, this is more so the case when it comes to shorter time horizons say like in months or quarters. This is because equity markets tend to be volatile in the short run and more stable in the long run.
Past performance is no guarantee of future returns but what cannot be denied is that the fund has been a consistent performer historically speaking.
It is also worth noting that along with the benchmark, the fund has also consistently left the category average performance behind.

Reason for underperformance in 2018

Earlier we had mentioned that it is not possible for a fund to consistently beat the benchmark and also how equity markets tend to be volatile in the short run but more stable in the long run.

Let us try and understand this better with the assistance of its performance in 2018 serving as a case study.

2018 was not a very memorable year for the fund for it was left behind by most of its peers

Additional reading: Click Here to read our complete review of Axis Long Term Equity Fund

So what caused its downfall?

The fund was heavy on mid & small cap stocks as opposed to large cap stocks.
Later on SEBI’s new rules regarding categorization of schemes was put into action and therefore the fund was caught on the wrong foot.
Keep in mind that before the categorization the fund was functioning as a mid cap fund and therefore it was light on large cap stocks.
The fund was converted to a Large & Mid cap fund and because of the new rules, it now needed to accordingly rejig its portfolio to make sure it was aligned with the new rules of minimum 35% allocation to each large & mid cap stocks.

Now this is not as easy as it seems on paper for the following reasons:

2017 was when mid & small cap funds had done extremely well as opposed to large cap funds.
Opposite was the case in 2018.
Now in order to rejig the portfolio, the fund manager would have needed to sell several mid & small cap stocks at a lower valuation in 2018 which he had bought at higher valuation either in 2017 or prior.
At the same time he had to allocate a higher proportion to large cap stocks which again meant buying them at a higher price since 2018 was a better year for large cap stocks as compared to mid & small cap stocks.
Reconstructing a portfolio is an arduous task because the fund manager has to take into account several factors like liquidity, buying and selling opportunities, market conditions, interest of long term investors, etc.

Selling at losses would mean the NAV would have taken a severe hit too.

Fund Manager

Mr Ravi Gopalakrishnan has been managing the fund since 11^th October 2019.
Prior to managing this fund, he was managing Canara Robeco Emerging Equities Fund which was also a large & mid cap fund.
It helps that a fund manager has prior experience of managing a fund of the same category, this is more so the case when it comes to a large & mid cap scheme.
The reason being mid cap stocks historically have been more volatile and thereby more difficult to manage. So therefore, when it comes to aggressive investing, one finds more comfort when the fund is being helmed by someone with an experienced head.

The fund is as volatile as you would expect any other aggressive fund to be but then again, it is this volatility that has generated impressive performances in the past. Investors need a long term view with a minimum time horizon of 5 years and those who fear volatility in the short term can go via the SIP route to meet their goals.

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