WF: Your fund has a stellar 3 year top decile performance, though performance in the nearer term seems sub-par. What’s been driving this splendid medium term performance and what on the flip side has contributed to challenges in the near term?

Mohan: The fund follows a bottom up fund management style and stock selection is the key determinant of performance. Doing our own research, the fund was able to identify ideas in the mid cap/ small cap space which were not very well covered by the sell side. Several of these stocks have delivered good returns. We focused on companies with improving earnings, which were run by a competent management and had attractive relative valuations. Our portfolio turnover ratio has been quite low as we usually let the investment thesis in the companies in our portfolios play out.

Coming to the past year, there has been a flight to safety in the markets given the uncertain macro environment globally and other factors like higher crude prices, credit issues and liquidity stress in the debt market, weakening currency and forthcoming elections which impacted the local environment. A select few stocks, some of which were quite expensive have risen in this market. Given that our portfolios were more diversified and we were underweight in some of these select stocks which did well our portfolios have underperformed.

WF: What is the market cap strategy for this fund and how has this strategy been implemented over the last 2 years as leadership changed between mid and large caps?

Mohan: The portfolio follows a multi cap strategy from the point of market capitalization. As of the end of January, over 60% of the portfolio of stocks was in large cap companies, and rest of the portfolio was in small cap and mid cap companies and cash. Over the past year, we have added to our exposure to large cap companies.

WF: Some experts who have been waiting for almost a decade for sustainable broadbased earnings growth momentum are now wondering whether we will see this anytime soon. What is your take on a broadbased earnings recovery and on markets going forward?

Mohan: In FY 20, we expect earnings for the Nifty index companies to grow. A good chunk of the earnings growth is likely to come from corporate banks on two counts, firstly because their earnings are coming off a low base and secondly while incremental slippages are low, they have reached good provisioning levels and are seeing growth in their top line as credit demand is picking up. IT earnings are expected to be in low double digits, and automobiles may gain from pre buying ahead of BS VI norms roll out.

WF: Which are the sectors you see creating sizeable wealth over the next 3 years?

Mohan: While there can be ample opportunities across markets, we feel that Cements, Corporate Banks, Services like Telecom and Hotels, and select names from Industrials and Speciality Chemicals may be the wealth creators over next 3 years.

WF: Investors who are disappointed with heightened market volatility over the last 12 months, may be reluctant today to commit money into a 3 year locked in equity fund. How should distributors position an ELSS offering to such investors at this stage?

Mohan: Volatility is an integral part of equity investments. Most certainly, more volatility brings in more risk. However, not to forget, volatility is a subject of concern only for a short-term investor. When one invests in an ELSS, the investment is mandatorily locked-in for a period of 3 years. A study of 3 years rolling returns across broad indices in India reveals that about 80% of the time, the investors have generated positive returns. Hence the odds of one losing his capital invested is 1/5. When the same study is conducted on expanded timeframes like 5 years, the chances of negative returns decreases furthermore. In fact, 7 years rolling returns states that there are 0% chances of negative returns. Distributors and Advisors can counsel their investors to not necessarily redeem their ELSS investments on completion of lock-in period. In longer term, being equity linked investment avenue, ELSS are wealth creating machines. Needless to mention other benefits like tax efficiency, power of compounding etc. are part of this parcel.

Disclaimer:

The views expressed, and information herein are independent views of the author and for informative purpose only and under no circumstances should be construed as an opinion or Investment advice. The information contained herein is not intended to be an offer to seek solicitation for purchase or sale of any financial product or instrument. Investment involves risk.

Recipient of this information should understand that statements made herein regarding future prospects may not be realized. Investors are requested to consult their investment advisor and arrive at an informed investment decision before making any investments. The Sponsor, Trustee, AMC, Mutual Fund, their directors, officers or their employees shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages arising out of the information contained in this document. Past performance may or may not be sustained in future. The schemes of Principal Mutual Fund may or may not hold securities of companies in these sectors.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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