Fund Call. Principal Large Cap: Principal focus on limiting losses

With markets continuing to remain volatile, large-cap funds are a better bet for risk-averse investors at this juncture. From a valuation perspective too, large-cap stocks currently lend more comfort than mid and small-caps. Investors with low risk appetite and reasonable return expectations could consider Principal Large Cap, a fund benchmarked to the BSE 100 index. Over one, three, and five-year periods, Principal Large Cap has outdone the benchmark returns by 2-6 percentage points. This performance is on par with or better than other large-cap oriented funds such as L&T Large Cap and DSPBR Top 100.

The fund outperforms its benchmark and peers during bull runs. But one area where the fund has lagged a bit is in its ability to hold the fort in volatile markets or contain losses during market falls. In the 2011 fall, for instance, the fund lost as much as the benchmark’s 26 per cent, while most large-cap peers showed more resilience. One reason for the lacklustre show then was its higher exposure to mid-caps. During this time, mid-cap stocks constituted 13 per cent of its portfolio. Besides, even as bank stocks took a beating in this period, the fund increased stake in the segment. However, the fund has made amends to its strategy since then. Rain or shine, its midcap exposure has remained at 5-7 per cent of its portfolio in the last two to three years. This apart, to protect downside in volatile markets, the fund also cuts down on its equity exposures and moves to debt when markets turn iffy. This strategy, for instance, helped it tide over the volatile markets of 2015 with aplomb, something it was not able to achieve in 2013.

Overall, the fund sports a decent track record. On a one-year rolling return basis, the fund has beaten the benchmark’s returns 77 per cent of the time during the last five years.

The fund churns its sectors quite well with an eye on what’s trending. Thus, even as banks and software remained the top choices, the fund quickly latched on to cyclicals such as auto, auto ancillaries and construction, to benefit from the 2014 rally.

Software holdings have come down in the last few months in view of the slowdown in many global markets. But the fund has upped stakes in defensives such as consumer non-durables. Hindustan Unilever has been added recently with an eye on bettering rural consumption. Pharma holdings saw an increase since, in the last few months of 2015, before being cut down in the last two-three months. The fund continues to bet on urban consumption through stocks such as Maruti Suzuki, Tata Motors, India Cements and Bajaj Finserv.