ICICI Prudential Value Discovery
When Mrinal Singh took over the reins of this fund in February 2011, it was his first stint at running a diversified fund. Since then, we have had the opportunity to evaluate him and his investment approach across market cycles, enabling us to build confidence in him. Over the years he has emerged as a skilled portfolio manager. While Singh specialises in value investing, he is also an expert in the small/mid-cap segment.
Singh runs this fund with a valuation-conscious approach. He relies on a combination of absolute and relative valuation parameters for picking stocks. Until mid-2014, he invested predominantly in the small/mid-cap segment. However, since then, this aspect of the strategy has undergone a change and the allocation to large caps has increased sharply (from 25% to nearly 75% as of August 2017). This could be attributed to two factors: stretched valuations in the small/mid-cap segment and a surge in the fund’s assets from INR 35 billion as of April 2014 to INR 81 billion by December 2014. Nonetheless, the modified approach is a departure from the way the fund was run earlier.
The strategy has few inherent risks as well. Given Singh’s extensive focus on valuation, the fund runs a risk of underperforming in momentum-driven and growth-oriented markets. Its recent underperformance vis-à-vis its benchmark index is a testimony of the same. Also, his value picks may result in value traps if stocks bought based on attractive valuations continue to fall further.
Having said that, so far Singh has been able to prudently navigate the fund’s investment process--whether it is shifting from small/mid-caps to large caps or keeping the fund’s valuation focus intact. However, given the fund’s large size, whether he will be able to efficiently shift sizable investments from large caps to mid-caps when the later becomes more lucrative in terms of valuation is an untested aspect. Nevertheless, we continue to draw conviction from Singh’s managerial capabilities and research focus. His preference for safety over outsize returns would result in the fund delivering a stable performance over the long term. Hence, we retain its Morningstar Analyst Rating of Silver.
ICICI Prudential Midcap
The challenges in managing a mid-cap fund are abundant. While unpredictability in the equity markets is accentuated in this segment, factors such as constrained liquidity, limited coverage, and poor disclosures make mid-cap investing a tricky proposition. Hence, the need for a skilled manager and a solid investment process cannot be overstated. ICICI Prudential Midcap makes the grade on both counts.
Mrinal Singh is a competent portfolio manager who has been in the job since May 2011. He has had extensive experience as an analyst in the small/mid-cap space. Unsurprisingly, intensive research forms the core of his investment approach. He fluidly combines top-down and bottom-up approaches to identify companies to invest in. Although the investment strategy here is intended to be growth at a reasonable price, Singh, given his expertise in value investing, tends to scout for stocks that are attractively valued. Therefore, to complement his value bent, Mittul Kalawadia, who typically adopts a growth-oriented investment approach while investing, was appointed as the comanager here on April 2016. As per the fund house, both the managers share equal responsibilities on this fund now.
This has also led to some tweaks in the fund’s investment process, though the broader strategy remains unchanged. For instance, an element of benchmark alignment has been introduced by reducing the extent of the portfolio’s deviation from its benchmark. Also, while selecting stocks, growth aspect is now given more prominence than before. Although ancillary, these changes would give teeth to the strategy.
The fund’s performance has been below average in peer-relative terms over the past few years, that is, from 2015 till 2017 so far. This is largely because Singh has positioned the portfolio for an uptick in the economic cycle, which is yet to happen. While we will evaluate how the comanagement shapes up in the fund going ahead, we continue to draw conviction from Singh’s presence at the helm of the affairs here. We believe his research-driven investment approach and executional capabilities would keep the fund in good stead. Hence, we reaffirm the fund’s Morningstar Analyst Rating of Silver.
