Principal Large Cap Fund: Why it is a good fund in the current economic situation

Principal Large Cap Fund was launched in the month October of 2020. We had reviewed the NFO of this scheme in our post, why invest in Principal Large Cap Fund NFO. Large cap funds must invest at least 80% of their assets in stocks of the 100 largest companies by market capitalization. An interesting feature of this fund is that, it also invests about 15% of its portfolio in US stocks. Though it is too early to review the performance of this scheme, we will recap in brief characteristics of large cap funds, why should large caps form the core of your investment portfolio and if this is a good time to invest in Principal Large Cap Fund.

Characteristics of large cap stocks

• Large cap companies are much larger in size compared to midcap and small cap companies. These companies are typically market leaders in their respective industry sectors. Their size, market share and entry barriers in the industry sectors they operate provide them with a competitive moat.


• Large cap companies by virtue of their size are much more resilient to economic shocks and recession, compared to midcap and small cap companies. As a result their risk profile is lower than midcap and small caps. Large cap stocks are less volatile than midcap and small cap stocks.


• Large cap stocks have substantial institutional ownership and are usually well researched. As a result they have much greater earnings visibility compared to midcaps and small caps. Large cap stocks are less likely to have unknown risks and sudden big negative surprises.


• Due to high institutional ownerships large cap stocks are much more liquid than midcap and small cap stocks. Liquidity should be an important consideration in investments even if you have long investment horizon. Low liquidity can at times, in extreme market conditions, have detrimental effect on fund’s performance.

About Principal Large Cap Fund

Principal Large Cap Fund was launched on 19^th October 2020 and has around Rs 302 Crores of assets under management (AUM) as at 31^st Dec 2020. The expense ratio of the scheme is 2.39%. Sudhir Kedia and Anirvan Sarkar are the fund managers of this scheme. The salient features of the scheme are as follows:-

• The scheme will have a diversified portfolio of 50 – 60 companies.


• 80 – 85% of the scheme assets will be invested in Indian large cap companies (top 100 companies by market cap).


• Up to 15% of the scheme assets will be invested in US large cap companies (minimum market cap of $50 billion). We had discussed earlier that a composite portfolio of 85% Indian and 15% US large cap stocks produces superior risk adjusted returns - You may kindly check this here.


• The scheme will invest across industry sectors and stock selection will be bottoms up.


• The investment strategy will be oriented more towards growth stocks compared to value stocks.


• Earnings growth and return ratios will be the preferred metrics for stock selection.


• The fund managers will focus on business models and management quality.


• The fund managers will actively manage risk to reduce portfolio volatility.

Is this a good time to invest in Principal Large Cap Fund?

• The current economic environment in the back-drop of COVID-19 pandemic is likely to result in significant earnings risk for companies in short to moderate term. While the market has bounced back from March 2020 lows, further price rally needs to be supported by improving corporate earnings. Large cap companies by virtue of their market share, leadership, competitive moats and financial strength are better positioned to withstand this crisis and emerge stronger.


• Major economic crises in the past, usually resulted in consolidation in several industry sectors. Stronger players usually emerge even stronger in the recovery process. Large caps are better positioned to benefit from consolidation in their respective industry sectors in the medium to long term.


• Though the market has recovered and is now trading at its all time high, we think that there are still legs remaining in this recovery. The market rally was largely fuelled by liquidity due to falling US Dollar. Experts believe that dollar may weaken further due to successful clinical trials and roll-out of COVID-19 vaccine in countries around the world including India.


• Though the COVID-19 crisis has resulted in a global economic recession, the global economy (including India) is expected to bounce back in 2021 and beyond. Though the market, especially large caps look expensive now, it is on account of an extra-ordinary situation. As economic prospects improve, we can expect the market to scale greater highs. This has been the nature of the past recoveries from bear markets.


• Triple advantage of investing in domestic large cap stocks, US large cap stocks and foreign exchange risk diversification. A composite portfolio of Indian large cap stocks (85% portfolio weight) and US large cap stocks (15% portfolio weight) produces superior performance consistency compared to Indian large cap indices (Nifty 50 TRI and Nifty 100 TRI).
  
  

  Source: Principal MF as on 31^st July 2020.

  
  The portfolio allocation to US stocks can boost returns of the scheme in the long term and also provide stability in investment cycles, especially if we have a W shaped recovery instead of V shaped recovery.


• Principal Mutual Fund has a strong long term performance track record. The fund house can benefit from Principal’s global investment experience, including access to advice and research from the US based PGI team. The fund managers of this scheme, Mr. Sudhir Kedia and Anirvan Sarkar have combined investment experience of more than 22 years.

Conclusion

Principal Large Cap Fund has completed nearly 3 months since launch. Though it is too early to analyze the performance of this scheme, it has been off to a good start rising more than 20% since inception. You need to have high risk appetite and a long investment horizon (at least 5 plus years) to invest in this fund. You can invest in this fund either in lump sum or SIP depending on your investment needs and financial situation. Investors should consult with their financial advisors if Principal Large Cap Fund is suitable for their investment needs.