HOME > MUTUAL FUND > EXPERT VIEWS
  EXPERT VIEWS
MUTUAL FUND NEWS
US recovery may derail
Sat, Aug 24, 2013
Source : Shoaib Zaman, Citrus Interactive

PVK Mohan is the Head of Equity and he also manages Principal Growth, Principal Retail Equity Savings, Principal Tax Savings and the equity portion of the Principal Balanced Fund.

He has over 18 years of experience in equity research and fund management. In his previous assignments he has worked with ICICI Prudential Asset Management as Senior Fund Manager (Equity) in PMS, DSP Blackrock Asset Management  as Portfolio Manager (Equity) in PMS and IL&FS Investments initially as part of a team providing Advisory Services to CIBC Oppenheimer (now part of Blackstone) and later as Fund Manager of IL&FS Mutual Fund. He holds a Post Graduate Diploma in Management from The Indian Institute of Management, Bangalore and degree in Electrical Engineering from REC Calicut.

In a forthright conversation he shared his thoughts about the economy and shared the various aspects of the fund management at Principal PNB AMC.

What is your view on the current account deficit?

It’s a matter of concern but hopefully the worst is behind us. If the measures to reign in gold imports bear results then things may not get worse, unless of course the global liquidity comes under pressure because of the Fed deciding to taper off QE. Local economic problems are very worrisome but those have been known and around for some time now.

Other than the fundamental factors, there is the issue of perception about India in the context of the upcoming elections though that concern is some time away. An unstable political environment would add further pressure on the rupee. At this time the big worry comes from dependence on portfolio flows to bridge the gap, as FDI flows remain subdued in the current environment.

Do you expect it to improve going forward from here?

It should become slightly better, the trend would be slightly better.  But if the question is are we going from some disaster zone into some very comfort zone then the answer would be no.The worst seems to be over but we are not out of the woods.

And what is your view on the food security bill?

The market has been expecting it so in that sense it is not a negative surprise. What needs to be seen is the form it takes and how it is rolled out since these will decide the total cost involved. Of course, sentimentally it can be seen negatively as it will put pressure on the fiscal deficit and raise the spectre of populism given that we have elections round the corner. Given that global liquidity seems comfortable at this point time, the market may not be as punishing on this issue, however if the global liquidity becomes tight these issues will come to the surface again.

Do you expect the Federal Reserve to stop completely?

They will slowly do it in a measured manner surely but my only point is that at some point they will have to start as indicated by the rising bond yields.  There are some people who think US bond yields could go all the way up to 3%-3.5%, may be even higher. That, I think, may derail the recovery in US that now seems well underway.

What are the unique risk measures that you have put in place at Principal?

I think there are few things. We have always stuck to the investment objective or the mandate. If it’s a mid-cap, it’s not that it’ll be 60 per cent mid cap and 40per cent large cap, we’ve never done that. So that’s not a typical risk but that’s risk of diversion from the stated objective, we never do that as a discipline.

In terms of portfolio risk, we have our own limits in case of stock and sector exposure. There are defined limits on how much overweight / underweight we can go and this encourages a balanced portfolio construction.

We also maintain a liquidity check for all our portfolios. The endeavor is to ensure that at least 70 per cent of a portfolio can be liquidated on a single day assuming that we are half of the last five day’s average trading volumes. Just by keeping a track of this we remain aware of the liquidity risk of the portfolio and ensure that we stay sensitive to this factor while constructing portfolios. 

Tell us about the placement of the different products by the AMC.

We have organized the products essentially in very simple way:

Large cap strategy: Principal Large Cap fund follows this strategy; it means that the fund will have BSE 100 as its benchmark. In this case the minimum market capitalization will be as much as the market capitalization of the 100th company. Principal Tax Saver Fund and the SMART Equities, the equity portion of SMART Equities will mirror the large-cap fund.

Diversified Strategy: Principal Growth fund can be stated as the flagship of this strategy. BSE 200 will be the benchmark. The minimum market capitalization will be the 200th company in the BSE 200. Personal Tax 96, another tax-savings fund mirrors the Growth portfolio.

Mid cap strategy: Here, the Principal Emerging Blue Chip is the flagship fund for this strategy. It is a mid-cap fund with CNX Mid Cap as the benchmark and we normally take mid-caps but there is a leeway for small caps, about 5-10 per cent of the portfolio.

We have three different dedicated fund managers for each strategy. Anupam is the Fund Manager for the large cap, me for the diversified and Dhimant for the mid cap. 

Yield Management Strategy: We also have dividend yield fund which also managed by Dhimant. The fund is benchmarked to the S&P CNX Dividend Opportunity Index, so stocks which are having a yield of at least that of the lowest yield stock in the index are eligible to be part of the portfolio, that’s very clear.

These are the four strategies. Everything is based and followed around this.

Does the Fund Manager have a final call in the building of a portfolio?

Yes. The fund manager has a final call, we sit and discuss ideas, we exchange ideas, and to the extent that they fit across all portfolios but then it’s the discretion of the individual fund managers’ as to what he wants to do. Whether they do buy, how much weight etc.; these are at the discretion of the individual fund managers.

I was going through your SMART Equity it’s an excellent concept, how did you arrive at the bands?

The bands were decided upon an analysis we ran on market valuations for Nifty since 1999 in terms of P/E multiples. The idea was to see the range it traded in and the amount of time it spent at each of these levels. We then plotted this data and converted it into bands, assigning a level of optimal equity exposure range at each of these levels, with the equity exposure highest at the lowest valuation band and lowest at the highest valuation band. The equity range at each valuation band gives some flexibility to the fund manager to choose the invested level.

Of course the market may at times trade well below the lowest band or even well above the highest band, but our study suggests that the market spends very little time at such extremes.

The P/E that we use is the four-quarter trailing P/E of the Nifty which is declared on the NSE website daily, making it a very transparent strategy.  The equity part of the portfolio is the same as that of the large cap fund, while the debt part is invested typically in liquid fund.  Holding direct equities rather than invest into units of the large cap fund makes it more tax efficient.

I think the concept is good. It does away with the need for investors to time the market as the fund would allocate to equities when the valuation is right and not be driven by sentiment and emotions.

How many dedicated research analyst do you have?

We have five analysts who track assigned sectors.

That includes Fund Manager

No. 

Fund Managers also double up as analysts?

Yes. Some of the companies and sectors are directly tracked by fund managers.

Tell us about the stock picking process at Principal PNB AMC. Do you also use technical analysis?

There is an appreciation or awareness of technical’s for our important holdings. The way we would look at this is not that it is a decision maker for what to buy or sell rather it can be used to time our buy or sell decisions for some part of the portfolio. Let’s say, I have been selling a stock and that company starts to look weak on charts, so I will accelerate the selling. So it’s not a determinant tool on what to buy or sell but it is more of a timing tool that we use it as.

We have Global Research Platform (GRP), a proprietary tool, from Principal. We receive a report from GRP every Monday morning. It has about 14 factors based on which they collect data and rank them from 1-to-100. Multiple stocks can have the same rank.

The way it will be interpreted is that it’s a tool that incorporates improving fundamentals, relative valuation against market and peers. It also tracks momentums, which means what smart men are doing, are there earnings upgrades rather than downgrades.  It incorporates all three factors and assigns a composite score of 1-to-100. For us 1-to-20 is a very strong buy signal and 80-100 is a very strong sell signal.  The analysts meet every week and review that list. If a stock has jumped from rank 60-to-30, although 30 is not a strong buy signal but the jump warrants our attention.

This is more like a starting point; it tells where the analyst can focus. It’s not a decision making tool but it is a tool that serves as a starting point for the analysts. Now that is again a common process across all our funds. This makes the investment more process driven rather rely purely on individuals and how they feel about stocks.

How do you evaluate the fund managers?

The fund managers are evaluated on the basis of the returns their fund has generated, how they rank in the peer set, the alpha generated over the benchmark index. The endeavor is to consistently be in at least the top end of the second quartile of the peer set. That’s the stated goal, if we are above that it is most welcome.  The idea behind being consistently in the upper end of second quartile is that it does not put undue stress on fund managers to maximize returns by taking excessive risk to be in the top quartile.  When I say on a consistent basis, it means on 12m, 24m, 36m and 60 m ideally.
 
|
|
|
|
|
|
|
|
 
blog comments powered by Disqus
  RELATED NEWS >>
September 17th , 2018
India’s long term growth story is intact: Harshad B
read >>
April 24th , 2018
Earnings pick up likely in infra, consumption, auto
read >>
December 20th , 2017
Equity Market Outlook – Mr. Anand Radhakrishnan
read >>
April 06th , 2017
Interest rate cut cycle is over: Suyash Choudhary
read >>
Most Viewed >>
May 06 , 2024
FPIs exercise caution amid US yield surge, awa
May 08 , 2024
Sebi rejects NSE proposal to extend trading ho
May 08 , 2024
Mutual fund equity buying tops Rs 1 trillion f
May 09 , 2024
You are losing a hefty amount if committing ei
EXPLORE
© CITRUS INTERACTIVE
Designed & Developed Accord Fintech Pvt. Ltd.