Why this flexi-cap fund got upgraded

5 questions on ICICI Prudential Value Discovery answered.
By Morningstar Analysts |  20-10-16 | 
 

ICICI Prudential Value Discovery Growth was recently revisited by our analyst and earned an upgrade. Here are five questions related to the fund.

Why has the category changed?

Earlier, the fund manager's hunt for attractively valued stocks had often taken him down the market-cap ladder, thus resulting in a mid-cap heavy portfolio. Until mid-2014, Mrinal Singh invested predominantly in the small/mid-cap segment. However, stretched valuations in that space and surging assets prompted him to expand his investment universe to accommodate large-cap stocks. The exposure to large-cap stocks in the portfolio has increased significantly, which as of August 2016, stood at roughly 70%.

When we last reviewed this fund in June 2015, it was a part of small/mid-cap category. However, in the light of the above changes in the fund’s portfolio and its management style, we changed its category to flexicap.

Why has the fund been upgraded?

What continues to work for the fund is the presence of Singh and his robust investment approach.

In our opinion, Mrinal Singh is a competent manager. He joined the fund company in June 2008 as an equity analyst and gained extensive experience in the small/mid-cap space. He assumed portfolio management responsibilities on a technology sector fund in August 2009 and subsequently on the equity portion of allocation and capital protection funds. He took over the reins of this fund in February 2011.

We have had the opportunity to evaluate Singh’s investment style over time and see more of him as a manager. This has enabled us to gain more confidence in him. We continue to draw confidence from his stock-picking skills and ability to execute the strategy with skill.

We believe the fund has the wherewithal to outperform its benchmark index over the long term. Hence, we upgrade the fund from a Morningstar Analyst Rating to Silver from Bronze.

How does the fund manager pick stocks?

Mrinal Singh professes to manage the fund in an unconstrained manner with value as an underlying theme.

Singh prefers quality stocks and will not invest in a company that doesn’t meet all his selection parameters. Hence, he doesn’t invest in companies that are highly leveraged. He scouts for stocks he believes are trading at a significant discount to their fair value. He relies on a combination of absolute and relative valuation parameters (such as P/E, price/book value, EV/EBITDA) for picking stocks. Additionally, he looks for differentiating factors (technological prowess, cost advantage) that can give the company a sustainable edge.

While a bottom-up approach is more prominent, top-down factors aren’t ignored. For instance, Singh is currently focussing on the businesses driven by domestic factors rather than global factors, given persistent concerns in the global markets. This is evident from his choice of investments from basic-materials and technology sectors. He is patient with his stock picks especially from the small/mid-cap segment, a strategy that goes well with his investment philosophy. The strategy is not without risk. It can hold back the fund in rising markets when valuations are stretched and also can lead to value traps. Hence, its long-term success will depend in no small measure on the manager’s execution capabilities. On that count, we believe Singh is equipped to successfully ply the strategy.

How has the fund performed?

This calendar year, the fund is lagging behind the category average. But over the past 7 years, it has consistently beaten the category average with amazing performances in 2009 and 2014. Its 3-, 5- and 10-year returns are also impressive.

From the time the fund’s character underwent a change (June 2014 to August 2016), it has delivered an annualised return of 21%, thus outscoring its benchmark index (12%) and a typical peer (18%) from the flexicap category.

For the same period, the fund outperformed 81% of category peers on the Morningstar Risk-Adjusted Returns front. In its erstwhile form under Mrinal Singh (February 2011 to May 2014), the fund clocked an annualised return of 18% and was the top performer within the small/mid-cap category.

Why has the benchmark been changed?

Recently the fund house changed the fund’s benchmark index from CNX Midcap to S&P BSE 500. In our opinion, this change can be attributed to two factors: stretched valuations in the small/mid-cap segment and a surge in assets to Rs 143.6 billion as of August 2016 from Rs 35.3 billion as of April 2014.

  • Fund: ICICI Prudential Value Discovery Growth
  • Category: Flexicap
  • Analyst Rating: Silver
  • Star Rating: 5 star
  • Fund Manager: Mrinal Singh
  • Expenses: 2.34%
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