NFO analysis: Principal Large Cap Fund
The large-cap indices have gained more than 50 per cent from their recent lows but still, they are down by two per cent year to date. In the same duration, the broader equity indices such as mid-cap and small-cap are up marginally and have outperformed the large-cap stocks. One of the major reasons why broader indices outperformed the frontline indices is because they hugely underperformed in 18 months, ending December 2019.
Historically, we have seen that such an outperformance continues for a while before it once again starts underperforming. A case in the point is the underperformance of broader indices during 2012-13 and their outperformance till the beginning of 2018. Therefore, it is hard to believe that the fund house has come out with a large-cap fund now. It may be for principal loyal customers. Now, let us know this in more detail. The NFO is already open for subscription and will close on October 12, 2020. The scheme re-opens for normal subscription on October 20, 2020.
Objective: It is an open-ended equity diversified fund that would majorly invest in equities and equity-related securities of companies, which are in the top 100 stocks by market cap. These are the companies that are defined as large-cap companies, according to a SEBI circular issued in the year 2017. Besides these, they will also invest in large-cap companies in the US.
Strategy: The fund would strategically attempt to build a diversified portfolio of large-cap companies across various sectors. The universe for the large-cap companies would be the top 100 companies by market cap. The stock selection process would follow a combination of a bottom-up and top-down approach with a focus on the fundamentals, current valuations, and the growth potential of the company. Besides, the fund manager may look at the company’s business model, financial strength, and competitive advantages that it enjoys along with return ratios to make a better portfolio. The fund identifies companies through rigorous fundamental analysis, using both the proprietary in the house as well as the third party research. The fund may also invest up to 20 per cent of the portfolio in foreign companies.
Fund Manager: The scheme will be together managed by Sudhir Kedia (Fund Manager) and Anirvan Sarkar (Associate Fund Manager). Sudhir Kedia manages the other five funds namely, Principal Large-cap Fund, Principal Mid-cap Fund, Principal Personal Tax Saver Fund, Principal Tax Savings Fund, and Principal Equity Savings Fund (Equity Portion). Meanwhile, Anirvan Sarkar would be a dedicated fund manager for foreign investments.
Our view
Our research shows that investing in NFOs is not the best of the investing tool, especially if they are not offering anything new or something that is topical. Besides, investment in the large-cap US stocks also looks ill-timed as empirically, it has been proved that after a decade of outperformance, the US market underperforms. Between 1990 and 2000, they outperformed only to underperform in the next ten years i.e. 2001-2010. In the last ten years, they have once again outperformed. Hence, one can expect underperformance from next year onwards.