The Hindu Business Line : Principal PNB Dividend Yield Fund: Hold

WITH an absolute return of about 40 per cent, the Principal PNB Dividend Yield Fund has lagged its benchmark S&P CNX-500 as well as its peer Birla Dividend Yield Fund in the 11 months since its launch. The fund's tilt towards oil stocks appears to have been responsible for its performance. This has been remedied in recent months, with the fund pegging up allocation to consumer non-durables and fertiliser stocks.

As the fund is yet to complete a year since launch, investors may wait and watch performance. Fresh exposures may be avoided for now. Birla Dividend Yield Plus has so far proved the better option for investors seeking to benefit from a dividend yield strategy.

Investment strategy: According to its features, the Principal PNB Dividend Yield Fund invests at least 65 per cent of its portfolio in stocks with a dividend yield 1.5 times that of the Nifty basket. The peg to the Nifty's dividend yield imposes a fairly stringent filter for stock selection. However, this is somewhat diluted by the flexibility to invest up to 35 per cent of the portfolio in stocks that do not meet this criteria. This portion is supposed to be reserved for "potential" dividend yield candidates.

While actually building its portfolio, however, the fund has not taken advantage of this flexibility. It seems to have invested largely in stocks that do meet the "1.5 times Nifty's dividend yield" criteria. As of July-end, the average dividend yield of the fund's portfolio was 3.2 per cent, sporting almost twice the yield of the Nifty basket (at 1.6 per cent).

The relatively high dividend yield level, combined with the bias towards consumer non-durables and bank stocks, give its current portfolio a defensive orientation.

Performance: In the 11 months since launch, the Principal PNB Dividend Yield Fund has generated returns of about 40 per cent on an absolute basis. This is against a 47 per cent appreciation in the S&P CNX-500, the fund's chosen benchmark. Birla Dividend Yield Plus, a fund with similar objectives, has recorded a 49 per cent return over the same period.

The fund's sector-wise choice of dividend yield stocks, appears to have impacted its performance. Stocks such as Indian Oil, ONGC and HPCL, by March 2005, accounted for about 10 per cent of assets and oil was the largest sector exposure after banks, at 12.6 per cent. These have not kept up with the broad market over the past year.

Over the past quarter, there has been a rejigging of the fund's portfolio. As of July, consumer non-durables and banks had the largest representation while exposures to oil stocks have been dramatically pruned.

The fund's stock choices in the FMCG and banking spaces, which include Hindustan Lever, Godrej Consumer, IOB and PNB, offer scope for reasonable capital appreciation over the next year.

Fund facts: Launched in October 2004, the Principal PNB Dividend Yield Fund now manages assets of about Rs 250 crore. It is managed by Mr Shyam Bhat.

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