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With the market remaining volatile, equity-oriented balanced funds suit the palette of investors with a low-to-moderate risk appetite. Principal Hybrid Equity is a good choice in this category. Earlier known as Principal Balanced, the fund was renamed recently following SEBI’s new scheme categorisation norms. Other attributes of the fund remain unchanged.
The fund has a mandate to invest at least 65 per cent in equities and the balance in debt.
Strategy and performance
Principal Hybrid Equity does not go overboard on equities even in secular bull runs. Equity exposure is maintained closer to the 65 per cent mandate in iffy and bearish markets. When the markets are on a song, the fund moves up this exposure to a maximum of 70 per cent.
With this strategy, the fund has been an outperformer across rallies, falls and choppy markets. Lower equity exposure has helped it contain losses better than the Nifty/Sensex indices and broader market indices such as the BSE/Nifty 500 in falling and iffy markets such as 2011, 2013 and 2015.
At the same time, the fund upped its game in the 2012, 2014 and 2017 rallies, fetching returns better than the bellwether indices in these years. Good sector and stock choices and altering of exposure to the mid- and small-cap stocks, based on market conditions, aided the fund to emerge on top in rallies. In 2014, for instance, the fund was quick to shed holdings in the defensive FMCG space and load on to cyclical sectors such as auto and cement. It also raised its mid-cap holdings to 15-20 per cent of its portfolio that year.
Overall, the fund has outdone its category average by 3-5 percentage points across one-, three- and five-year time periods.
Current portfolio
The fund usually holds a diffused portfolio of about 60 stocks.
Banking is the preferred sector at all times. Over the past 1-2 years, the fund has brought down its pharma holdings, given the multiple headwinds in this space. While it reduced software holdings till 2017 for the same reason, the fund has upped its exposure to this space in recent times to take advantage of the rally in mid-cap software stocks as well as the tailwind from the depreciation of the rupee against the dollar.
It holds about 8 per cent now as against 4-5 per cent in this space in end-2017.
The fund is playing it safe by sticking predominantly to large-cap stocks. Mid-cap holdings have come down to less than 10 per cent of the portfolio now from double that a year ago.
Since November 2017, the fund’s exposure to long-term government securities has come down from 12 per cent to 7 per cent now. Yields on 10-year government securities have moved up by nearly a percentage point in this period to about 7.9 per cent now, benefiting the fund.
Recent entrants to the portfolio include M&M, M&M Financial Services, HDFC, Kirloskar Ferrous Industries, GAIL, Power Grid and India Cements.
On the debt side, it predominantly holds AAA and AA-rated NCDs of companies such as HDFC, Dewan Housing, NABARD and SIDBI.
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