Principal Smart Equity Fund

Principal Smart Equity Fund is an open-ended equity from Principal Mutual Fund which follows strong investment processes and systems.

Summary

Type	Open-ended equity scheme	Benchmark Index	CRISIL Balanced Fund Index
Min. Investment	5,000	Face Value	10
Entry Load	Nil	Exit Load *	Upto 1 year: 2.00% /  Upto 2 years: 1.00% After 2 years: Nil
Issue Opens	November 26, 2010	Issue Closes	December 10, 2010

Investment Objective*

The investment objective of the scheme is “to generate long term capital appreciation with relatively lower volatility through systematic allocation of funds into equity; and in debt /money market instruments for defensive purposes. The Scheme will decide on allocation of funds into equity assets based on equity market Price Earning Ratio (PE Ratio) levels. When the markets become expensive in terms of ‘Price to Earnings’ Ratio; the Scheme will reduce its allocation to equities and move assets into debt and/or money market instruments and vice versa.”

 

*Source: Scheme Information Document

Is this fund for you?

Principal Smart Equity Fund (PSEF) is mandated to invest in large cap stocks, which may or may not constitute to form a part of the BSE 100 index. Moreover, it would not refrain from participating in the primary market issues (IPOs) which satisfies the criteria of being large caps.

 

While undertaking its stock picking activity, the fund with adopt the bottom-up of approach to investing, by giving due importance to the Price Earnings Ratio (PER) of the S&P CNX Nifty, which would enable the fund manager to assess how cheap or expensive the equity markets are trading. Moreover, the asset allocation of the fund will be dynamically followed depending upon the weighted average PER (of the S&P CNX Nifty). So, when the equity markets are becoming expensive (in term of weighted average PER of the S&P CNX Nifty), the fund would move its asset allocation from equity to assets in the debt and money market segment. Similarly, when the equity markets are trading at cheaper levels, the fund would move its allocation from debt and money markets instruments to equity and equity related instruments. Hence, in a way the fund adopts a set quant model to rigorously time the markets, which may not necessarily be always successful. Thus when they shift out of equity (to debt) assuming PER being high, and if the equity markets continue to rally after that; then the investors would have to compromise on the returns front.

Portfolio & Investment Strategy

PSEF portfolio will be inclined towards the large cap segment. The fund defines large caps as those stocks with a market cap of equal to or above the market cap of the lowest market cap stock of the BSE 100 Index and which may or may not be a constituent of the BSE 100 index at the time of investment. Moreover, the fund will not refrain from investing in IPOs, as long as it meets the market capitalisation criteria for large caps.

 

For its stock picking activity, PSEF would follow a bottom approach, with due importance to the weighted average PER of the S&P CNX Nifty and fundamental factors. This will enable the fund manager, to assess how cheap or expensive the stock is trading, given the fundamentals which they reflect.

 

So, when the equity markets are becoming expensive (in term of weighted average PER of the S&P CNX Nifty), the fund would move its asset allocation to equity and move towards assets in the debt and money market segment. Similarly, when the equity markets are trading at cheaper levels, the fund would move its allocation from debt and money markets instruments to equity and equity related instruments.

 

But unlike other value funds, which follow the PER to ascertain the valuation of stocks, PSEF would follow a dynamic allocation towards debt and equity by tracking every level of weighted average PER of the S&P CNX Nifty.

 

Weighted Average PE Ratio of S&P CNX Nifty	Equity Component (%)	Debt Component (%)
Upto 16	100	0
Above 16 – Upto 18	80 – 100	0 – 20
Above 18 – Upto 20	60 – 80	20 – 40
Above 20 – Upto 24	30 – 50	50 – 70
Above 24 – Upto 26	10 – 20	80 – 90
Above 26 – Upto 28	0 – 10	90 – 100
Above 28	0	100

(Source: Scheme Information Document)

 

And so based on the dynamic asset allocation followed by tracking weighted average PER of S&P CNX Nifty, the fund will follow the under-mentioned asset allocation.

 

Instruments	Allocation Range (% to Total Assets)		Risk Profile High/Medium/Low
	Minimum	Maximum
Equity & Equity Related Instruments of Large Cap Companies	0	100	Medium to High
Debt or Money Market Securities and / or units of Money Market / Liquid Schemes of Principal Mutual Fund	0	100	Low to Medium

(Source: Scheme Information Document)

 

Fund Manager Profile

Mr. Rajat Jain is the Chief Investment Manager of Principal Pnb Asset Management Co. Pvt. Ltd. He is a graduate in Mechanical Engineering and holds a Diploma in Management from IIM, Lucknow. He has over 20 years experience in portfolio management. Prior to joining Principal Pnb AMC, he was associated with SBI Mutual Fund.

 

Mr. Jain also manages Principal Global Opportunities Fund, Principal Large Cap Fund, Principal Services Industries Fund, Principal Index Fund, Principal Personal Tax Saver Fund and Principal Monthly Income Plan (Jointly with Mr. Shobit Gupta), Principal Monthly Income Plan – MIP Plus (Jointly with Mr. Shobit Gupta).

Fund Outlook

Primarily as PSEF’s equity portfolio would constitute to be stocks from the large cap universe, the fund’s fortune would be closely linked to the performance of the large cap segment. Hence, due to the mandate, the fund may be unable to benefit from mid cap rally, whenever it happens.

 

Moreover, while the strategy of having a dynamic asset allocation for investing into equity and debt (based on the Weighted average PER of the S&P CNX Nifty) is good; it also attempts to rigorously time the markets, which may not always give success to the fund manager. There may arise a situation where the fund manager (as per the set quant PER model), may shift a substantial component from equity to debt expecting stocks to be expensive, but after that rebalancing activity the equity market may continues to rally further. So, in this case investors would have to compromise on the returns front.

 

But on the positive side, the fund has the capability of managing the downside risk due to the dynamic asset allocation followed (by tracking the weighted average PER of the S&P CNX Nifty), as PSEF portfolio would be skewed towards debt and money market instruments, at every inflated PE levels (determined through their set model), thus being conservative on the outlook of the equity markets.

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