Mid cap stocks are the companies which fall below the large caps but above the smaller companies in the market capitalisation pyramid. These are the companies which are not as established as the large cap ones. But unlike mature large caps, such companies tend to have a higher growth potential. They are often less researched and hence, more often, available at a discount to the large caps. However, these companies are well established as compared to smaller companies and have the greater reach and revenues. Investment in mid-caps can be rewarding over a longer term, as these companies need considerable time to grow in size. Though midcaps are often referred as the future large caps; very few companies actually manage to zoom past the competitors. These companies are not as stable as the large sized companies and tend to show fluctuations in profits and at times struggle to sustain when the going gets tougher. For this reason, investment in mid-caps is considered risky but it could be well rewarding too.
Principal Emerging Bluechip Fund (PEBF) is one such open-ended fund from the stable of Principal Mutual Fund, which follows a blend style of investing. Being launched in November 2008 the fund has completed a little over 3 years now.
The fund's primary investment objective is "to achieve long-term capital appreciation by investing in equity & equity related instruments of mid cap & small cap companies."
PEBF follows a mandate of investing 65% - 95% of its assets in equity and equity related instruments of mid cap companies, 5% - 15% in equity and equity related instruments of small cap companies, and upto 30% of its asset in equity and equity related instruments of companies other than the mid and small cap domain; thus taking its total composition in equity in the range of 70% - 100%. Also having a defensive consideration and to manage its liquidity requirements, the scheme may also invest upto 30% of its assets in debt and money market instruments.
Over the past one year, PEBF has held a dominant exposure towards the mid and small cap ranging from 62% - 74%. But ascertaining the volatility experienced by the Indian equity markets in the last one year due to global and domestic economic worries, the fund has preferred to take a defensive stance and thus taken exposure towards to the large cap space ranging from 24% - 35%. Similarly, the fund has also preferred to take cash calls (ranging from 1% - 6%) citing the volatility in the mid and small cap domain.
Equity Portfolio
| Holdings | Jul 2011 | Aug 2011 | Sept 2011 | Oct 2011 | Nov 2011 |
| Lupin Ltd. | 3.9 | 4.3 | 4.3 | 4.2 | 4.3 |
| Asian Paints Ltd. | 4.1 | 4.8 | 4.7 | 4.3 | 4.3 |
| Eicher Motors Ltd. | 2.3 | 2.6 | 3.1 | 3.2 | 3.4 |
| GSK Consumer Healthcare Ltd. | 3.4 | 3.1 | 2.5 | 2.5 | 2.9 |
| Torrent Pharmaceuticals Ltd. | 3.1 | 3.1 | 2.4 | 2.5 | 2.7 |
| HCL Technologies Ltd. | 2.5 | 2.4 | 2.6 | 2.8 | 2.7 |
| Godrej Consumer Products Ltd. | 2.9 | 2.8 | 2.8 | 3.0 | 2.6 |
| Shree Cement Ltd. | 1.6 | 1.6 | 1.9 | 2.0 | 2.4 |
| Jammu & Kashmir Bank Ltd. | 2.1 | 2.1 | 2.2 | 2.3 | 2.3 |
| DiviS Laboratories Ltd. | 1.4 | 1.7 | 1.9 | 2.1 | 2.3 |
As far as the portfolio is concerned, while investing predominantly in the mid and small cap domain, PEBF follows a bottom-up approach. Moreover, the fund does not refrain itself from investing in Initial Public Offerings (IPOs) which would constitute a part of the CNX Midcap Index. As a defensive consideration the fund also invests a moderate (upto 30%) portion of its total assets in the large cap space.
As on November 30, 2011 the fund held in all 63 stocks in its total portfolio; of which 'A' group ones accounted for 63.5%, while the rest 36.51% were held in the 'B' group stocks. The fund has also been reasonably consistent with its stock holdings since its portfolio turnover ratio is moderate at 1.01 times.
Being benchmarked to the CNX Midcap Index, PEBF holds 63 stocks in its latest portfolio (i.e. as on October 31, 2011), where the top-10 stocks and top-5 sectors constitute 30.0% and 35.4% respectively of its total portfolio.
How PEBF has fared vis-à-vis its peers
| Scheme Name | 6-Mth (%) | 1-Yr (%) | 3-Yr (%) | 5-Yr (%) | Std. Dev. (%) | Sharpe Ratio |
| Principal Emerging Bluechip (G) | -20.5 | -30.9 | 27.6 | - | 9.46 | 0.23 |
| UTI Mid Cap (D) | -16.2 | -18.7 | 26.4 | 3.4 | 8.23 | 0.24 |
| Birla SL Midcap (G) | -16.0 | -22.7 | 24.6 | 7.6 | 9.48 | 0.20 |
| Kotak Midcap (G) | -16.2 | -20.8 | 24.5 | 2.2 | 7.88 | 0.23 |
| SBI Magnum MidCap (G) | -15.9 | -20.8 | 21.4 | -2.7 | 11.20 | 0.18 |
| CNX Midcap | -20.3 | -25.9 | 20.8 | 5.0 | 8.84 | 0.19 |
The table above reveals that so far the performance of PEBF has been quite luring. Over a 3-Yr time frame, the fund has clocked a return of 27.6% CAGR, thereby outperforming its benchmark by a substantial margin.
Also when assessed on the volatility front, PEBF has exposed its investor to average risk (as revealed by its Standard Deviation of 9.46%), and has been able to clock satisfying risk-adjusted returns as well (as revealed by the Sharp Ratio of 0.23 against the 0.19 of CNX Midcap), thus making it an average risk-high return investment proposition in the category.
Fund Manager Profile
| Name of the Fund Manager | Mr. Dhimant Shah |
| Total Work Experience | Over 7 years |
| Managing the fund since | Jun-11 |
| Qualifications | B.Com, ACA |
As seen above Principal Emerging Bluechip Fund has been able generate luring returns by exposing its investors to average risk, thus resulting in it achieving a satisfying risk-adjusted return. Hence we think those investors who already have exposure to this fund can continue to hold the same. However it is noteworthy that decision of investing in a particular fund should not be taken only based on its 1 or 3 year performance. One should instead prefer the fund which shows consistency across market phases and qualifies based on other performance parameters too.
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