Top quartile fund celebrates 10 years of wealth creation

Dhimant Shah

Senior Fund Manager

Principal Emerging Bluechip Fund

  • Principal Emerging Bluechip Fund completes 10 years of wealth creation, with a highly creditable top quartile long term track record (3 yr and 5 yr)
  • Dhimant shares great insights into what makes some emerging businesses succeed big time while others fall by the way side. Businesses which combine agility with discipline and have proper capital allocation with strong cashflows are likely to succeed over the long haul – these are the stocks that the fund consistently scouts for
  • Near term outlook may remain choppy, though valuations have become more reasonable
  • Bullish on corporate oriented banks, cement, industrials, chemicals etc., sectors; Bearish on autos, construction, metals.

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WF: Congratulations on completing 10 years with this fund in the industry. What have been some of the significant milestones during this 10 year journey of wealth creation?

Dhimant - The fund was launched in November 2008 amid the volatility of the global financial crisis. Over the past 10 years of the fund’s existence, among the major events impacting the markets we have seen the slowdown and stagnation in the Indian economy in the early part of the decade, the taper tantrum of 2013, the problems of the stressed assets of the banking sector, demonetization and the consequent financialization of savings in the economy, the slowdown and subsequent recovery in the IT and pharma sectors, the sharp volatility in commodity and energy prices globally and finally rising interest rates globally and their impact on EM flows. Over this period, the fund has managed to create wealth for investors by following a disciplined stock selection and portfolio construction strategy which has helped the fund create meaningful alpha vis-vis the benchmark. During the upsides in the market, the fund has managed to beat the benchmark handsomely while marginally underperforming the benchmark during the bear phases.

WF: In these 10 years of observing many emerging businesses blossom and many others fail to live upto expectations, what are some of the common threads that connect businesses that actually grow over time to become successful leaders? What, by contrast are common threads that cause promising businesses to belie expectations and turn mediocre?

Dhimant - The biggest strength of emerging businesses or mid-sized companies is the presence of the promoter. The best kind of promoter brings hunger for growth, drive for efficiency and continuous improvement and an understanding of the need for tight financial controls to the business. The companies which grow sustainably are those which combine the agility of the small business with the mindset of the discipline needed to run a large business. One area which is key is proper capital allocation for example. Mid-sized businesses are more vulnerable to adverse changes in the business environment simply because they are smaller and less able to take shocks like working capital stress or a demand slowdown. The companies which have grown from mid-caps to large caps have shown an ability to manage these challenges. On the other hand, unrelated diversification, poor capital allocation, no focus on cash flow and not being pro minority shareholder usually don’t end well for companies.

WF: Having navigated through all phases of the market over these last 10 years, what are some principles that you believe work well to help the fund manage volatility and create wealth?

Dhimant - We have essentially focused on diligent stock selection (try to gain a good understanding of the underlying business, the motivation and the vision of the management team, the potential growth opportunity and attractive relative valuation of the stock ) and disciplined portfolio construction (adequate diversification and observance of risk limits, portfolio monitoring) which together have worked well for us. Continuous portfolio monitoring helps avoid mistakes when the original thesis for which we had bought the stock is not playing out.

WF: Markets seem to be recovering after a bout of weakness. Can we now say that a mean reverting correction is behind us or should one remain circumspect on near to medium term prospects for markets?

Dhimant - We could still see some volatility in the near term with some macro concerns (both global and local) and event risks. The global environment still is in a risk off mode which means that equity as an asset class is not doing well. While the valuations of the market have become more reasonable and selectively provide good buying opportunity for long term investors, the near term looks choppy.

WF: You have 86 stocks which comprise your portfolio, any specific reason for holding as many stocks?

Dhimant - We believe that since mid-caps are inherently volatile, adequate diversification is an important part of portfolio construction in this fund.

WF: Which sectors do you see value in post the recent correction and which sectors still look expensive to you?

Dhimant - We like corporate oriented banks, cement, industrials, chemicals etc. as sectors where one can find good opportunities. We are cautious on autos, construction, metals etc.

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