Strong SIP Performance of Principal Emerging Bluechip Fund: A top quartile midcap fund

The midcap stocks which had been trailing the large cap stocks for the greater part of 2013, in terms of returns, caught up with the large cap stocks by the end of the year, and over the past few months, especially after the elections, have outperformed the large cap stocks. The chart below shows the returns of Nifty, the frontline index of the largest market cap stocks and CNX Midcap index, the benchmark index of midcap stocks, over the last 6 months, 1 year and 2 year time periods.

Small & midcap funds had also been trailing large cap funds for most part of 2013. However, since September 2013, the performance of the small and midcap funds category has been quite spectacular, and this category has clearly outperformed the large cap funds category. The chart below shows the average returns of the large cap and small & midcap funds categories, over the last 6 months, 1 year and 2 year time periods.

Within the small and midcap fund category, the Principal Emerging Bluechip Fund has been a strong performer since its inception. It has consistently beaten the small and midcap funds category over different time periods. It has given a return of 85% in the last one year. Systematic investment plan in the Principal Emerging Bluechip Fund (Growth Option) has given an annualized return of nearly 27% since inception, which is quite outstanding by any standard. The chart below shows the returns of the Principal Emerging Bluechip Fund and small & midcap funds categories, over the last 1 year, 3 years and 5 years time periods (NAVs as on Sep 26 2014).

Fund Overview

The Principal Emerging Bluechip Fund was launched in the depths of the financial crisis in October 2008 and has given returns to its investors since its inception. The fund has र 288 crores of assets under management. The expense ratio of the fund is 2.55%. The manager of this fund is Dhimant Shah. Morningstar has a 3 star rating for this fund. The fund is suitable for investors planning to make investments for long term financial goals, like retirement planning, children’s education, wealth creation etc. The fund is open for both growth and dividend options.

Portfolio Composition

The fund has a midcap, growth oriented focus. The portfolio is overweight on cyclical sectors like BFSI, Cement and Construction, Automobile & Auto Ancillaries, Engineering etc. To balance its exposure to cyclical sector, the portfolio also has allocations to defensive sectors. Pharmaceuticals, IT and FMCG comprise nearly 23% of the portfolio holdings. The cyclical sectors expected to do well once the steps taken by the new Government to revive in economic growth and investment cycle bear fruit. As such, the Principal Emerging Bluechip fund has the potential to deliver good returns over the short to medium term. The portfolio is very well diversified in terms of company concentration. The top 5 companies in the fund portfolio, Motherson Sumi, Tech Mahindra, ICICI Bank, Federal Bank and Aurobindo Pharma account for only 17% of the portfolio value. Even the top 10 companies in the fund’s portfolio account for only about 31% of the portfolio holdings.

Risk and Return

In terms of risk measures, the annualized standard deviation of monthly returns of the Principal Emerging Bluechip fund is in line with the small & midcap funds category. However, on a risk adjusted returns basis, as measured by Sharpe Ratio, the Principal Emerging Bluechip fund has outperformed the small & midcap funds category. Sharpe ratio is defined as the ratio of excess return (i.e. difference of return of the fund and risk free return from Government securities) and annualized standard deviation of returns. Higher the Sharpe ratio better is the risk adjusted performance of the fund. See the charts below for comparison of volatilities and Sharpe ratios of the Principal Emerging Bluechip fund and the small & midcap funds Category

र 1 lac lump sum investment in the fund NFO (growth option) would be at a value of nearly र 5.6 lacs as on Sep 26 2014. The lump sum annualized return since inception is 34%. The chart below shows the growth of र 1 lac investment in the Principal Emerging Bluechip fund (growth option).

The chart below shows the returns since inception of र 3000 monthly SIP in the fund (growth option). The SIP date has been assumed to first working day of the month. The chart below shows the SIP returns of the fund.

The chart above shows that a monthly SIP of र 3000 started at inception of the Principal Emerging Bluechip fund (growth option) would have grown to nearly र 4.7 lacs by Sep 26 2014, while the investor would have invested in total only about र 2.1 lacs. The SIP return (XIRR) is nearly 27% since inception. The SIP returns of the Principal Emerging Bluechip fund is a testimony of the benefits of systematic investing. The investors who continued to make systematic investments through bear and bull market cycles would have made excellent returns.

Conclusion

The Principal Emerging Bluechip fund (growth option) has nearly 6 years of strong performance. This fund is investors with a long time horizon. Investors should note that midcap funds are intrinsically more risky than large cap funds, but they have the potential to give higher returns in the long term. One can consider investing in the scheme both through the systematic investment plan (SIP) or lump sum route. Investors should consult with their financial advisors, if Principal Emerging Bluechip fund is suitable for their investment needs.