presenting midcap fund - principalindia.com · quartile. stocks referred above are for illustration...
TRANSCRIPT
Invest in tomorrow’spotential leaders, today.
NFO: 6th Dec – 20th Dec, 2019
Presenting
An open ended equity scheme predominantly investing in midcap stocks
Midcap Fund
Shifts appreciatedamount to another fund
Aims to protect againstsharp fall in market
Available with following facilities:
What are Midcaps?What makes Midcaps an interesting investment bet?
What are Midcaps?
Every phase has its own importance for success of business.However, the Growth Phase sees maximum Wealth Creation for stakeholders including investors…
Growth phase and wealth creation can be a long term process and creation of wealth depends upon various factors. There is no guarantee that all the companies in Midcap space will be able to create wealth.
Initial phase Growth phase Matured phase
Typical growth path of a good business
Data as on 30 Jun 2019. Source: AMFI; Bloomberg
What are Midcaps?
Largely Entrepreneur Driven
Mature business
Lower volatility
Longevity
Large Caps Small Caps
Leader in smaller sectors Niche players in established sector
Market cap rangefrom `8,857 crs to
`27,445 crs
The Midcaps
“Sweet Spot”High growth potential
Higher volatility
Nifty Midcap 100 TRI vs Nifty 50 TRI on daily rolling returns
Nifty Midcap 100 TRI outperformance over Nifty 50 TRI Nifty 50 TRI outperformance over Nifty Midcap 100 TRI
3years
5years
10years
The potential of Midcaps to outperform large caps increases significantly over longer time horizon
Midcaps have better odds to outperform large caps… Odds only gets better with time…
Data as on 30th Sep 2019; Source: MFI Explorer. Past performance may or may not be sustained in future. Daily rolling returns for Nifty Midcap 100 Index is available from Jan 2003 & hence above analysis is done from inception of index.
Why Midcaps?
Data as on 30th Sep 2019; Source: MFI Explorer. Past performance may or may not be sustained in future. Daily rolling returns for Nifty Midcap 100 Index is available from Jan 2003 & hence above analysis is done from inception of index. - For Illustration purposes only. The market movement depends on various factors and hence it cannot be assumed that the correction is over. Investors are requested to note that Midcap performance is cyclical in nature. The above simulation is for illustration purpose only and should not be construed as a promise on returns and safeguard of capital. This should not be construed as a guarantee or forecasting of any returns.
On 3, 5 and 10 years daily rolling returns basis, Nifty Midcap 100 TRI has delivered more than 15% CAGR for more than 50% of time.
In the study, Nifty Midcap 100 TRI has no negative observation in 5 and 10 year periods.
Returns dispersion – in percentage of observations
Why Midcaps?
Midcaps have better odds to outperform large caps… Odds only gets better with time…
Returns >15% 37% 55% 30% 54% 42% 51%
Returns >8% and <15% 36% 23% 49% 31% 54% 49%
Returns >0% and <8% 25% 13% 21% 14% 4% 0%
Returns < 0% 2% 9% 0% 0% 0% 0%
Total no. of observations 3,405 2,906 1,667
Years Daily Rolling Return
Years Daily Rolling Return
Years Daily Rolling Return3 5 10
Nifty 50 Nifty Midcap 100 Nifty 50 Nifty Midcap
100Nifty 50 Nifty Midcap
100Returns Range
Growth of Nifty 50 TRI and Nifty Midcap 100 TRI
In Jan 2003, Mr. A invested ` 1 Lakh in Nifty 50 TRI and Mr. B invested ` 1 Lakh in Nifty Midcap 100 TRI.As on 30th Sep 2019, Mr. B’s return outscored Mr. A’s returns by ` 7.54 Lakhs
Data as on 30th Sep 2019; Source: MFI Explorer. Past performance may or may not be sustained in future. Data for Nifty Midcap 100 TRI is available from Jan 2003; hence the above analysis is done from the inception of indexFor illustration purposes only. Expenses have not been considered. The market movement depends on various factors and hence it cannot be assumed that the correction is over. Investors are requested to note that Midcap performance is cyclical in nature.The above simulation is for illustration purpose only and should not be construed as a promise on returns and safeguard of capital. This should not be construed as a guarantee or forecasting of any returns.
0
500
1000
1500
2000
2500
3000
Nifty 50 TRINifty Midcap 100 TRI
` 20.73 lakhs
` 13.18 lakhs
Investment of ` 1 Lakh
Nifty 50 TRI and Nifty Midcap 100 TRI rebased to 100 as on 1st Jan 2003
`
Why Midcaps?
Is it the right time to invest in Midcaps?
Food for thought !!!How long will the current underperformance continue?
Data source: NSE; Data as on 30th Sep 2019. Past performance may or may not be sustained in future.The market movement depends on various factors and hence it cannot be assumed that the correction is over. Investors are requested to note that Midcap performance is cyclical in nature. The above simulation is for illustration purpose only and should not be construed as a promise on returns and safeguard of capital. This should not be construed as a guarantee or forecasting of any returns.
Historically, all periods of Midcap underperformance are followed with periods of outperformance…71%
15%
-1%
-11%
23%
-7%
25%
1%
-6%
12%
-12%
25%
11%4%
19%
-19%-14%
Midcap Outperformance as compared to Nifty 50 Index Performance (%)
Why Midcaps now?
76%
13% 39
%
42% 57
%
-51%
78%
19%
-24%
29%
8%
33%
-3%
4%
30%
5% 3%
147%
28% 38
%
31%
79%
-59%
102%
20%
-30%
41%
-4%
58%
8% 8%
49%
-15%
-12%
Nifty 50 Midcap 100
Source: Motilal Oswal India Strategy dated 26th Sep 2019. The market movement depends on various factors and hence it cannot be assumed that the correction is over. Investors are requested to note that Midcap performance is cyclical in nature. The above simulation is for illustration purpose only and should not be construed as a promise on returns and safeguard of capital. This should not be construed as a guarantee or forecasting of any returns.
2.8 3.66.5
2.86.7 8.2 6.9
9.011.0
16.7 17.0 16.7
21.9
15.9 15.1
0
5
10
15
20
25
Nifty Midcap 100 - Market Cap (INR Tn)
21.9
Nifty 50’s total market cap hasincreased to an all time high in Sep’19
Why Midcaps now?
13.720.3
28.814.7
27.638.4
31.338.7 42.7
55.5 54.5 57.1
76.0 78.9 84.5
0102030405060708090
Nifty 50 - Market Cap (INR Tn)
Whereas…Nifty Midcap 100 total market cap is30% lower than its peak of Dec 2017 and also below the Dec’14 levels
Source: Motilal Oswal India Strategy dated 26th Sep 2019. The market movement depends on various factors and hence it cannot be assumed that the correction is over. Investors are requested to note that Midcap performance is cyclical in nature. The above simulation is for illustration purpose only and should not be construed as a promise on returns and safeguard of capital. This should not be construed as a guarantee or forecasting of any returns.
Why Midcaps now?
25.6
15.9
17.5
5
12
19
26
33
Midcap PE (x) Nifty PE (x)
-9
-60
-30
0
30
60
Midcap Vs Nifty PE Prem/(Disc) (%)
Midcap P/E index has corrected from 25.6x in Aug’18 to 15.9x currently
Midcaps’ premium to Nifty has turned into a discount
Why stock picking is key to investing in Midcaps?
We performed an analysis on 101st to 250th stock by market cap as on 30th Sep 2009. Our observations are as follows:
Analysis 1
75 out of 142 posted positive returns while
67 companies posted negative returns during this period
Out of 150 companies, 142 survived this period142
75
50
21
The average returns of top 50 companies is18.9% CAGR
21 of the then Midcap companies are today’s large cap stocks
Data as on 30th Sep 2019. Source: Capitaline. Past performance may or may not be sustained in future. The market movement depends on various factors and hence it cannot be assumed that the correction is over. Investors are requested to note that Midcapperformance is cyclical in nature. The above simulation is for illustration purpose only and should not be construed as a promise on returns and safeguard of capital. This should not be construed as a guarantee or forecasting of any returns.
Stock picking is the key
14.03 41.0922.28(Bajaj Finserv Ltd.)(Federal Bank Ltd.)
Data as on 30th Sep 2019. Source: Capitaline. Past performance may or may not be sustained in future. The 10 year CAGR (Sep 2009 – Sep 2019) of 150 stocks have been ranked in descending order. Ranks 1-35 are 1st quartile, 36-72 are 2nd quartile, 73-107are 3rd quartile and 108-142 are 4th quartile. Stocks referred above are for illustration purposes only and should not be construed as stock recommendation. The schemes of Principal Mutual Fund may or may not hold these stocks currently or in future. Thesecompanies may move in or out of midcap list based on market movements.
High returns dispersion makes stock picking the key to wealth creation in Midcap investing
1st Quartile
2nd Quartile
4th Quartile
Min Returns (%) Average Returns (%) Max Returns (%)
3rd Quartile
-15.61 1.74-6.90(Yes Bank Ltd.)(Corporation Bank Ltd.)
1.89 14.007.93(Motilal Oswal Financial Services Ltd.)(Engineers India Ltd.)
-45.14 -15.70-25.50(HMT Ltd.)(KSK Energy Ventures Ltd.)
Qua
rtile
Ana
lysi
sWe performed an analysis on 101st to 250th stock by market cap as on 30th Sep 2009. Our observations are as follows:
Analysis 1
Stock picking is the key
Returns as on 30th Sep 2019. Source: Capitaline, Internal Analysis. Past performance may or may not be sustained in future. * Stock Listing - AMFI
Returns Range 10 years 5 years
>50X 3 0
10-50X 24 0
5-10X 10 0
3-5X 109
1-3X 27 37
50%-100% 5 19
0-50% 5 29
-50-0% 1810
>-50% 1314
Data Not Available 2443
Total Companies 150
There is wide dispersion of returnswithin the 150 Midcap stocks in thelonger term.
46 stocks have grown over
3X in the last 10 years.
47stocks have grown over
2X in the last 5 years.
Longer holding period resulted insignificant returns to the investor.
Stock picking is the key
Opportunities
Threats/ Risks
We performed an analysis on 101st to 250th stock by market cap as on 30th Jun 2019*. Our observations are as follows:
Analysis 2
Returns as on 30th Sep 2019. Source: Capitaline, Internal Analysis. Past performance may or may not be sustained in future. * Stock Listing - AMFI
>-50% -50% to -20% -20% to 0% 0% to 20% 20% to 50% >50%
5
34
39
26
338
There is wide dispersion of returnswithin the 150 Midcap stocks inshorter term like last 1 year.
41out of 150 stocks have deliveredmore than 20% returns.
Conversely, 78 out of 150 stockshave delivered negative returnsduring the same period.
Stock picking is the key
We performed an analysis on 101st to 250th stock by market cap as on 30th Jun 2019*. Our observations are as follows:
Analysis 2
In a nutshell
Past performance may or may not be sustained in future.
Right stock selectionin Midcap stocks is the key towealth creation
Midcaps are bettermultipliers in the long term, despiteshort term volatility
With longer time spentin Midcaps, chances of Outscoring large caps are better
Stock picking is the key
IntroducingPrincipal Midcap Fund
Investment Objective and StrategyRisk Reward FrameworkPortfolio DiversificationRegulatory and Internal risk limits
Performance attribution analysisBenchmark and peer group analysisRisk / Reward analysis
Equity Investment ProcessStock Universe
In-house Research
Third Party Research
Industry Experts
Management Meetings
6 Pillar Investment Framework
IdeaGeneration
DueDiligence
StockSelection
Investment Universe(200-225 Stocks)
Portfolio Monitoring and Evaluation
Portfolio Construction(Compounders + Alpha Generators)
BusinessDynamics
Operating Matrix
Size,Scalability &
Longevity
Operational efficiencies
Quality &Sustainability of
profits
Management quality &
Business model
Efficiency &Distribution of
capital
Price the Value and not Value
the Price
Profitability Quality of Growth ValuationCapital
Allocation
The 6 Pillars of our Investment Process
Portfolio Construction Portfolio Review Sell Discipline
• Strict adherence to investment process
• Meet every company before investing
• Buy and Hold Strategy with typical horizon of 2-3 years
• Benchmark agnostic
• No active cash calls
• Single Midcap stock allocation not exceeding 4%
• 3-4 annual interactions with portfolio companies
• In-house earnings estimates with regular monitoring
• Continuous monitoring of Corporate Governance and Promotor Pledge
• Focus on valuations
• Consensus earnings catching up with our estimates
• Adherence to Target Price achievement
The investment strategy stated above may change from time to time without any notice and shall be in accordance with the strategy as mentioned in the Scheme Information Document of the scheme.
Portfolio Management
The investment strategy stated above may change from time to time without any notice and shall be in accordance with the strategy as mentioned in the Scheme Information Document of the scheme.
An integral part of our portfolio construction and portfolio management strategy
Investment objective & strategy
Portfolio risk-return framework
Diversification
Exclusions if any
Other considerations
Alignment of the investment idea to the mandate
Regulatory & Internal risk limits
Sector or stock limits
Tracking error
Liquidity of the stock
Concentration risk
Beta of the stock
If you don’t invest in risk management, it doesn’t matter what business you’re in, it’s a risky business…
Risk Management
The investment strategy stated above may change from time to time without any notice and shall be in accordance with the strategy as mentioned in the Scheme Information Document of the scheme. Sectors stated above should not be construed as recommendation from Principal Asset Management and/ or Principal Mutual Fund. The schemes of Principal Mutual Fund may or may not hold any position in these sectors. The views given above may change from time to time.
Investment opportunities
with possibility of…
Turnaround/Business Restructuring• Improvements in business environment or
Company fundamentals• Cost control measures and Operational
efficiencies• Change in Management• Changing regulations• Balance sheet restructuring• Product rationalization and innovation
Value Migration• Addition to Product offering• Play on premiumization and changing
consumption pattern• Technology and Innovation in products
and process• Identify early stage of change in
business/industry cycle
Value Unlocking• Corporate action, Mergers and
Acquisitions opportunities• Identifying intrinsic value opportunities
New Age Economy• Emerging sectors• Currently India is poised for numerous
such opportunities in spaces like Insurance, Healthcare, Renewable Energy, Asset/Wealth
Managers, Fin-Tech,
eCommerce Movie Exhibition Migration to Electric
Vehicles Organized Retail Logistics
Principal Midcap Fund Investment Strategy
7
14
21
28
35
42
AtulCity Union BankSRFVoltas
Source: CapitaLine; Internal Analysis. Past performance may or may not be sustained in future. Stocks referred above are for illustration purpose only and for explaining the concept. It should not to be construed as recommendation by Principal AMC. They represent Midcap stocks in various schemes of Principal Mutual Fund. The schemes of PrincipalMutual Fund may or may not hold these stock currently/in future.
Co. Name Atul City Union Bank SRF Voltas5 Year CAGR 23.67% 25.24% 29.61% 22.80%
Some of our top wealth creators that are currently in the Midcap universe
All stock prices rebased to 10 as on 30th Sep 2014
3.65X
3.08X2.89X2.79X
Our top wealth creators
This are merely illustrations to explain the investment philosophy. It does not constitute any advise to sell, buy or in any manner transact in this security and should not be considered as Research Report. The fund manager may choose not to hold the stock at a later date. There may be other stocks in the portfolio which may not have had a similar performance. Investors are advised to consult their financial advisors. Past performance may or may not be sustained in future.
Our top wealth creators
• Atul’s businesses are broadly classified into 2 segments, 1) lifescience chemicals segment and 2) performance & other chemicalssegment.
• Growth in the last 5 years has been driven by improved utilisationlevels, better demand outlook, pricing tailwinds and operatingleverage.
• The company achieved its debt-free status in FY2018.
• City Union Bank is one of the best-operated regional private banks.• Strong presence in MSME lending in Tamil Nadu.• It has consistently preferred quality over growth, which has served
them well in terms of asset quality.• A conservative outlook on lending, cost control and a strong
regional connect in Tamil Nadu has enabled the bank toconsistently record ~15% RoE with mid-teens growth.
• SRF is a dominant player in refrigerants and specialty chemicals • The Company primarily operates under 1) Technical Textiles, 2)
Chemicals and 3) Packaging films • However, its growth and investments in specialty chemicals (used as
agrochem/pharma intermediates) have been key drivers ofperformance.
• SRF’s specialty chemicals business is now the focus area, with R&D and infrastructure investments (~` 29bn over FY15-19) expected to meet the demand from global innovators. .
• Voltas is one of the largest player in the AC Industry and is well set tobe a beneficiary of increasing AC penetration and consumerdemand.
• On the other hand, Voltas’s focus on process and better commercialterms has aided EMP margin expansion.
• Voltas-Beko’s JV is setting up manufacturing plant at Sanand, Gujaratwhich is expected to be commissioned by end of 2019.
• This plant will significantly enhance the product profile especially fordirect cool refrigerators and washing machines.
• The JV is in an investment phase and plans to expand its exclusivebrand outlets (currently 150) across the country.
Atul Ltd.
SRF Ltd. Voltas Ltd.
City Union Bank Ltd.
7 Member strong equity fund management team
Over 1500 company annual interactions with companies
Over 100 man years of investment team experience
Use of GRP(Principal's proprietary investment software)
Successfully invested in Midcap space as part of our other portfolios
In-house Research Capabilities
Introducing SMART and MY GAIN Facilities
Facilities in Principal Midcap Fund
Aims to protect against sharp fall in market
Shifts appreciated amount to another fund
Why SMART Facility?
In a nutshell, it helps you reduce the risk of timing the market
Since its peak in Jan 2018, the Nifty Midcap 100 TRI has corrected 24% until 30th Sep 2019
In case of falling market, SMART Facility will endeavor to possibly capture lower ends of markets as per its very nature
Predicting bottom of any equity is impossible. However, with SMART Facility, an investor can rely on systematic investment
Introduction to SMART FacilityHow SMART Facility works?
This facility is available exclusively during NFO period
SMART Facility lets you
stagger your investments
25% is invested in the Principal Midcap
Fund and 75% into Principal Cash Management Fund
If the market falls below 3% from the date of allotment, the SMART Facility gets activated and 25% of the invested amount is deployed in Principal Midcap Fund
Incase if the market does not fall, the switch takes place at month end from Principal Cash Management Fund to Principal Midcap Fund
If the SMART Facility deployment takes place during the month based on market fall, the month end switch gets deactivated for that month
01
02
03
04
How SMART Facility works?
25%
25%SmartTrigger2nd
25%
Initial Investment
*Includes any rise or fall in the value of investment
How SMART Facility works?
Facility divides and deploys your investment in 4 parts:
On Allotment – Dec 2019
Units of Principal Midcap Fund allotted and balance 75% is invested in the Principal Cash Management Fund
25%
Subsequent Month – Jan’20
3% fall in Nifty Midcap 100 Index from the date of initial allotment or last business day of the Month (if SMART Facility did not activate during the month)
Subsequent Month – Feb’20
Further 3% (total 6%) fall in Nifty Midcap 100 Index from the date of initial allotment or last business day of the Month (if SMART Facility did not activate during the month)
Subsequent Month – Mar’20
Further 3% (total 9%) fall in Nifty Midcap 100 Index from the date of initial allotment or last business day of the Month (if SMART Facility did not activate during the month)
SmartTrigger
1st
SmartTrigger3rd
*
Illustration (assuming 15% appreciation trigger is specified by investor)
Principal Midcap Fund
Principal Fund of your choice
Amount Invested ` 50,000.00 Allotment NAV ` 10.00 Units Allotted 5,000.00
Trigger 1 15%
Appreciated NAV ` 11.50 Units redeemed 652.17 Amount Switched to Target Scheme ` 7,500.00 Balance Units 4,347.83 Balance in Principal Midcap Fund* ` 50,000.00 Opening Balance in Target Scheme* ` 7,500.00
Trigger 2 15%
Appreciated NAV ` 13.23 Units redeemed 567.11 Amount Switched to Target Scheme ` 7,500.00 Balance Units 3,780.72 Balance in Principal Midcap Fund* ` 50,000.00 Balance in Target Scheme* ` 15,000.00
*The illustration excludes MTM gain/loss. In the actual scenario, the amount may vary depending on the market movement.
Invest inPrincipal Midcap Fund
Investment appreciates to reach the target rate of return
Units redeemed from Principal Midcap Fund and amount switched to any Principal Fund of your choice
Your investments in Principal Midcap Fund
Your investment in a Principal Fund of your choice
The flow of investments
You specify the target rate of return to facilitate auto trigger
0
Fund Details
Nature of SchemeAn open ended equity scheme predominantly investing in Midcap stocks.
Investment ObjectiveTo generate long term capital appreciation by predominantly investing in equity and equity related instruments of Midcap companies.However, there is no assurance or guarantee that the investment objective of the Scheme will be achieved.
Investment PlanDirect & Regular
Investment OptionsGrowth & Dividend
BenchmarkNifty Midcap 100 TRI
Minimum Application Amount• New Investor – ` 5,000/- for both Dividend and Growth Option and any
amount thereafter under each Plan/Option• SMART – ` 25,000/-• Systematic Investment Plan: Minimum twelve installments of ` 500/- each• Systematic Transfer Plan: Minimum Six installments of ` 1,000/- each• Regular Withdrawal Plan: Minimum Six installments of ` 500/- each
Load Structure• If redeemed/ switched on or before 365 days from the date of allotment:
Nil for redemption/ switch out of units up to 20% of the units allotted (the limit)
• 1% on redemption in excess of 20% of the limit stated above-Redemption of units would be done on First in First out Basis (FIFO)
• Nil thereafter
Fund ManagerMr. Ravi Gopalakrishnan has over 25 years of experience in researchand asset management business. During the course of his career, hehas worked across many Asset Management Companies, includingCanara Robeco AMC, Pramerica AMC, and Sun F&C AMC. He hasmanaged several funds across Large Cap, Multi-cap and Midcapstrategies. He has a very strong research background and has soundknowledge of the fund management business. Mr. RaviGopalakrishnan is a M.S. Finance(Investments) & holds a M.B.A.
Associate Fund ManagerMr. Sudhir Kedia has over 13 years of experience in research andasset management business. During the course of his career, he hasworked with Mirae India AMC and ASK Investment Managers. He hasmanaged Hybrid strategies and other Multi cap portfolios is hisearlier organisations.He has a very strong research background and has soundunderstanding of the fund management business.
Executive Summary
Source: Motilal Oswal India Strategy dated 26th Sep 2019. The market movement depends on various factors and hence it cannot be assumed that the correction is over. Investors are requested to note that Midcap performance is cyclical in nature. The above simulation is for illustration purpose only and should not be construed as a promise on returns and safeguard of capital. This should not be construed as a guarantee or forecasting of any returns. The Investment theme/strategy stated above is as per current market conditions and may change from time to time. However the same shall be in accordance with Scheme Information Document of the scheme.
Midcap Investing Favorable Environment for Midcap Investing
Midcap Investingwith Principal
Entrepreneur driven companiesin Growth Phase
More volatile as compared with Large Cap but rewarding –Outperformed on 3, 5 and 10 year Rolling Returns basis
Midcap Index has produced 46 multi-baggers over last 10 years
Nifty Midcap 100 has underperformed Nifty 50 in last 2 years
Nifty Midcap Market Cap down 31% from Peak in Dec 17
Since Aug Midcap PE has correctedfrom 25.6x to 15.9x and PB from 3X to 2X
Valuations (PE) of Nifty Midcap 100’s premium to Nifty 50 has turned into a discount
Government focus on economic revival
Investing theme - Government Spending, Indian Demographics, Value Migration, Business Restructuring/Turnaround, Value Unlocking, New Age Economy
Focus on Valuations , Corporate Governance, Promoter Pledge, Uniquely Positioned and Measurable risk
Midcap Investing Experience and Expertise
SMART & My Gain Facility
DISCLAIMER: The investment strategy stated above may change from time to time without any notice and shall be in accordance with the strategy as mentioned in the Scheme Information Document ofthe scheme. The views contained herein are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the solediscretion of the reader. This material should not be relied upon by you in evaluating the merits of investing in any securities or products. Diversification does not guarantee investment returns and doesnot eliminate the risk of loss. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors maynot get back the full amount invested. Past performance may or may not be sustained in future. The views and strategies described may not be suitable for all investors. Furthermore, whilst it is theintention to achieve the investment objective of the investment product(s), there can be no assurance that those objectives will be met. Investors are advised to consult their Investment advisors fordetermining their risk appetite and Tax Advisor before taking any investment decision.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Product Label