Conservative BAF structure delivers top quartile performance

PVK Mohan

Head – Equity

Principal MF

Principal’s BAF posted a top quartile performance in a difficult year. Mohan attributes it to the simple yet effective P/E based model and a large cap orientation within equities

FII flows to EMs are improving – though they may not reach CY17 levels due to prevailing global uncertainty

Get ready for an FY20 of moderate equity returns, with significant news flow driven volatility in phases during the year.


WF: Your fund relies largely on historical P/E as the basis to determine equity allocation. In the context of multiple opinions around the futility of historical P/Es in a depressed earnings environment, how well has this parameter served you in this fund?

Mohan: The historical P/E actually works very well over the longer term as it does away with subjectivity and uncertainty associated with forward earnings. In fact in a depressed earnings scenario or in case of a scenario where earnings witnesses a downgrade, this model works better. Most importantly, this model works better in a market scenario driven by fundamentals and not euphoria

WF: How has the equity component moved over the last 24 months – through the highs of 2017 and the volatility of 2018?



WF: Performance over the last 1 year has been better than category averages, leading to a top quartile ranking – what have been the key drivers of this performance?

Mohan: The markets have been struggling in the last one year, more so the midcap & smallcap stocks. Our fund, by virtue of being relatively conservative in terms of invested level and large-cap orientation has thus done well

WF: Opinions are divided on the optimal equity strategy for a BAF product: some say the debt component gives a cushion to enable the fund manager to go aggressively in the mid and small caps space in the quest for alpha while others say that BAF investors expect a smoother journey, which can only be offered by large caps. What is your position on this debate?

Mohan: We believe BAF is a product more suited to relatively conservative, long term investors who expect returns slightly better than debt products, in a more tax-efficient manner and with lesser volatility. Hence a strategy which focuses on fundamentals (earnings) with a large-cap orientation is a better way to structure this product

WF: What is your market outlook over the next 12-18 months?

Mohan: The factors which impact the markets are the macroeconomic scenario, fundamentals (market earnings growth, market valuations and the direction and rate of change therein) and technical factors (fund flows, expected capital raising etc.). Their relative importance varies depending on where they stand compared to their long term averages etc. This year, the presence of the general elections has added an additional factor to the mix which will be important from a near term perspective. While over the long term politics has not had a major impact on the markets, over the short term, it has the potential to cause sharp volatility.

The macro for India has been improving given the moderation in oil and commodity prices, a stable Rupee and low inflation. We do not see it as a matter of concern for most of 2019. The markets are trading in line with long term average valuations and we expect the earnings for FY 20 to improve compared to FY 19 given that they are concentrated in financials (esp. corporate oriented banks), IT and autos. FII inflows into EMs are likely to improve compared to the last year, but we do not think they will revert to the highs of CY 17, given the level of global uncertainty. We think the markets will have a moderate year (high single digit – low double digit returns) with substantial volatility in between driven by news flow. In terms of risks, we have to watch for the risk of higher oil prices and potentially higher fiscal deficit in FY 20.

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