Our analysts' take on the equity funds of ICICI Prudential AMC

By Morningstar Analysts |  24-04-17 | 
 

ICICI Prudential AMC won the ‘Best Fund House – Equity’ award at the Morningstar India Fund Awards, 2017. Here’s a look at some of the funds which our analysts reviewed over the past year. 

ICICI Prudential Dynamic

  • Analyst Rating: Silver
  • Last Reviewed: December 2016
  • Star Rating: 3 stars
  • Category: Flexi Cap
  • Fund Manager: Sankaran Naren
  • Investment Style: Large Blend

The fund has a disciplined investment process and an active portfolio management approach. Naren follows an aggressive contrarian strategy and is willing to buy companies that are in the midst of a short-term crisis or transition but remain fundamentally sound. Though taking cash calls is integral to the strategy, the fund has not taken high cash exposure in the past few years.

The manager evaluates sectors from a top-down perspective, favouring those with attractive fundamentals and shifting away from cases in which he thinks valuations are stretched. He studies factors such as fiscal policy, current account deficits, inflation, economic growth rates, and so on, to form his top-down views. While picking stocks, he makes use of relative valuations to invest in large-cap stocks and knocks out stocks with high leverage. The strategy is complex, and the success of the fund depends on skilled execution; we believe Naren can make the process work.

The fund is positioned true to its large-cap orientation by maintaining around 70% of its portfolio. When valuations in the mid-cap space are attractive, the fund manager seeks to increase the fund’s exposure to such stocks while ensuring it does not constitute major part of the portfolio. He aggressively trades large-cap picks based on relative valuations, but with small/midcaps he tends to have a longer investment horizon.

The turnover ratio of 124% for the equity component bears out the aggressive trading.

The fund’s deeper-value profile and heavy contrarian bets drags the portfolio away from that of both the CNX Nifty Index and its peers. Even though he typically keeps higher cash, the fund has delivered impressive returns during his tenure.

Read the analyst note.

ICICI Prudential Top 100

  • Analyst Rating: Silver
  • Last Reviewed: December 2016
  • Star Rating: 4 stars
  • Category: Large Cap
  • Fund Manager: Sankaran Naren
  • Investment Style: Large Blend

Naren follows a disciplined investment process and an active portfolio management approach. The fund has a large-cap bias, and Naren evaluates sectors from a top-down perspective, favouring those with attractive fundamentals and shifting away from ones where he thinks valuations are stretched. He studies factors such as fiscal policy, current account deficits, inflation, economic growth rate, and government policies to form his top-down views.

Within the chosen sectors, Naren makes use of relative valuation parameters to invest in large-cap stocks he believes are attractively priced relative to their growth prospects. While picking stocks, he focusses on the financial strength of the company and knocks out stocks with high leverage.

He also keeps an eye on the global economic environment while investing in sectors such as metals, where international factors have a significant bearing on domestic prices.

Naren can trade aggressively and rapidly enter/exit stocks, and simultaneously buy and sell stocks from the same sector based on relative valuations. For instance, in 2016 within the IT sector, he exited Infosys with its stock price running up and at the same time increased allocation to Cognizant. We believe the investment process deployed here allows Naren to play to his strengths.

The manager runs this fund as a pure-play large-cap offering by maintaining around 90% of its assets in the segment. As a result, the portfolio looks markedly different from that of a typical peer that can invest roughly up to 30% of its assets in small/mid-caps. While constructing the portfolio, Naren follows a concentrated portfolio that differentiates the fund from its peers in terms of the number of stocks and assets in the top 10 holdings. With the manager’s excellent stock-picking skills we are comfortable with his concentrated portfolio approach, which has the potential to fetch higher returns. The turnover ratio of 106% for the equity component bears out the aggressive trading strategy.

Unlike ICICI Prudential Dynamic Plan, taking cash calls is not a part of the investment strategy here.

Read the analyst note.

ICICI Prudential Infrastructure

  • Analyst Rating: Bronze
  • Last Reviewed: December 2016
  • Star Rating: 3 stars
  • Category: Sector - Infrastructure
  • Fund Managers: Sankaran Naren and Atul Patel
  • Investment Style: Large Blend

Naren invests predominantly in companies engaged in or aiding the infrastructure sector. His investment universe is quite extensive as he invests in most sectors barring

pharmaceuticals, technology, media, and consumer staples; the excluded sectors constitute roughly 25% of the Indian market.

Naren’s large-cap investments account for roughly 50%-70% of the portfolio. The fund’s portfolio as of November 2016 carries a higher exposure to small-cap stocks as opposed to midcaps. His holdings such as KNR Constructions, Kalpataru Power Transmission, and ITD Cementation India typify this approach. He is currently betting strongly on the telecom and utilities sectors, preferring to buy companies when they are going through a downturn because of a temporary phenomenon, tying in with his contrarian approach.

He remains heavily invested in telecom major Bharti Airtel, in line with the AMC’s positive view on the stock. The fund also has exposure to the banking sector with stocks like ICICI Bank, Yes Bank, and the State bank of India. Overall, the portfolio reflects the manager’s contrarian bias towards value stocks.

Naren looks at sectors from a top-down perspective with a view to assign weightings to sectors based on their conviction levels. While evaluating stocks, he looks at the process from a bottom-up perspective and seeks to invest in long-term growth stories that tend to play out during a 3- to 5-year period. He prefers companies with good corporate governance standards and strong management. Naren is not averse to investing a small portion of the portfolio in stocks that are highly leveraged or fail on some of his qualitative criteria, provided they are trading at a significant discount to their fair value. In such cases, he follows a purely bottom-up driven analysis, wherein companies are valued more conservatively.

The fund’s thematic nature will lead to a volatile showing on the fund, given the cyclical nature of the sector.

Read the analyst note.

ICICI Prudential Value Discovery 

  • Analyst Rating: Silver
  • Last Reviewed: September 2016
  • Star Rating: 5 stars
  • Category: Flexi Cap
  • Fund Manager: Mrinal Singh
  • Investment Style: Large Growth

Singh’s investment approach entails scouting 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. Until mid-2014, 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.

When we last reviewed this fund in June 2015, it was a part of small/mid-cap category. However, in the light of the changes in the fund’s portfolio and its management style, we changed its category to flexicap. Nonetheless, it continues to be an impressive performer. It outperformed the category average for 7 consecutive years. Though it underperformed last year, its 10-year returns put it at top of the chart in its category and it also is impressive in the 5-year return parameter.

Read the analyst note.

ICICI Prudential Midcap 

  • Analyst Rating: Silver
  • Last Reviewed: August 2016
  • Star Rating: 3 stars
  • Category: Small/Mid Cap
  • Fund Manager: Mrinal Singh
  • Investment Style: Mid Blend

Intensive research is integral to Singh’s investment approach, with an emphasis on understanding the business and its drivers. He scouts for companies with differentiating factors such as technological prowess, cost advantage, and strong pricing power, among others, that can give the company a sustainable edge over peers. In the case of smaller companies, Singh will invest only if he is comfortable with their management. This approach largely shortlists companies with established businesses.

Though the strategy can be termed broadly as growth-at-a-reasonable price, Singh also invests a portion of the portfolio in value stocks. He also pays heed to valuations while picking stocks, freely combining absolute and relative valuation parameters (such as P/E, P/BV, EV/EBITDA).

Singh’s investment style bears out what he professes to do: buy reasonably priced growth stocks and stay invested until they deliver. As per the fund’s defined investment universe, he predominantly selects stocks that fall within the market-cap range of the IISL Nifty Free Float Midcap 100 Index, but he is not limited to stocks from the index. At least 70% of assets are invested in mid-caps, 10% in small caps, and 10%-15% in large caps. The role of large caps in the portfolio is to ensure adequate liquidity. Singh constructs a portfolio with 40-50 stocks with the top 10 stocks accounting for 35%-40% of the portfolio, in line with the category norm.

Cash exposure is capped at 10%.

Read the analyst note.

ICICI Prudential Focused Bluechip 

  • Analyst Rating: Bronze
  • Last Reviewed: May 2016
  • Star Rating: 4 stars
  • Category: Large Cap
  • Fund Manager: Manish Gunwani
  • Investment Style: Large Growth

Gunwani plies a benchmark-conscious strategy wherein the portfolio’s sector weights are loosely aligned to those of the S&P CNX Nifty, subject to a deviation of +/-5% (absolute). Hence, the top-down approach has little relevance. He uses the in-house, large-cap model portfolio as his initial reference point when choosing stocks. Although he also uses the fund house’s internal fair value approach and the alpha alert, the model portfolio takes precedence throughout the security-selection process.

Within a sector, he performs business analysis to identify the best ideas. In addition, he uses free cash flow/enterprise value ratio (3-year average) along with price/book value and return on equity, among others, to determine a company’s fair value. Typically the fund will invest only in the top 200 stocks by market cap.

Gunwani has a quality bias when choosing stocks--he favours companies with robust business models, strong entry barriers, and the ability to scale up without eroding profit margins. However, he is not averse to investing in companies that do not fulfill all of his qualitative criteria if the stock offers a trade-off against valuations. The trade-off in terms of a company’s management versus its valuations can differ across sectors. For example, if valuations become relevant in the pharma sector, they could take a lower precedence in leveraged sectors like banks.

The fund comprises roughly 60 stocks, consisting solely of large caps. The top 10 stocks account for roughly 45% of the portfolio compared with 50% for the category average, and the top 20 stocks account for about 69% of the portfolio. While we view the execution of the strategy in a positive light, it is important to take note of the change in the concentration levels in the portfolio, as compared with two to three years ago when the portfolio held upwards of 60% in the top 10 stocks.

Read the analyst note.

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