Management
Portfolio manager Sankaran Naren has run ICICI Prudential Dynamic since September 2006. Naren joined ICICI Prudential Mutual Fund in October 2004 and was earlier associated with Refco Sify and HDFC Securities, among others. He has overall 18 years of experience in investment management, equity research, etc. This is his first stint in managing money and prior to managing this fund, Naren was responsible for managing ICICI Prudential Discovery and ICICI Prudential Tax Plan.
Strategy
This is a "go anywhere" fund. It would invest in large-, mid- and small-cap stocks. The fund adopts a defensive investment approach and would overweight sectors like fast moving consumer goods, pharmaceuticals, etc, during bearish market conditions, while avoiding expensive sectors where bubble exists, during bullish market phases. The portfolio manager would also shift the fund’s portfolio into cash during market downturns in order to protect the fund’s downside.
During volatile market conditions, the portfolio manager uses "covered call" strategy to hedge the portfolio. This means, that in case the stock in the portfolio declines, the manager would earn premium from writing the call on the stock. This is more like a hedging strategy and works well during market volatility. Currently, the portfolio manager has hedged 20% of fund’s portfolio.
We believe this strategy works well in down or volatile market conditions. The fund is likely to decline less in down market conditions and hence is suitable option for investors, who want equity exposure, but would like to protect their capital. However, during up market conditions, the fund may not be able to capture the entire market rally, owing to its hedging strategies like cash allocation, derivatives, etc.
Costs
This fund is a bit more expensive as the portfolio manager uses derivatives to hedge the portfolio from markets risks. The fund’s annual expense ratio was at 2.30%, as compared to category average of 1.97%. We would like if the expenses of the fund are in line with its other peers.
Performance
The fund strives to outperform in all kinds of market conditions. It registered strong outperformance over the longer term. The fund’s trailing return since inception (October 2002) was at 33.7% CAGR, as compared to benchmark (S&P CNX Nifty) return of 25.3%.
However, during short-term, especially during the last six months (market upturn), the fund underperformed the benchmark index. The fund's performance during the last five years was at 32.7%, outperforming the benchmark by 9%. The fund was ranked at the sixth position and is five stars rated by Morningstar, during the five year period.
Performance over discreet calendar years depicted erratic pattern with bottom quartile returns (2003 & 2004) interspersed with top quartile returns (2005 & 2006). During 2007 (bullish market scenario), the fund was featured in bottom quartile and underperformed the benchmark significantly by 14%. In contrast, it outperformed the benchmark by 7% in 2008 (sharp market downturn) and featured in top quartile.
The fund was less volatile than its peers as reflected by its 30% standard deviation in the last three-year period, as compared to 35% standard deviation for its peers.
Overall, the fund was able to do well in up markets and down markets conditions as reflected by its up capture and down capture ratios of 105% and 85% respectively.
Stewardship
ICICI Prudential is a strong name in the asset management business. The firm has successfully managed equity assets and has been able to build investor wealth in the long run. The portfolio manager does not invest in this fund. However, he has investments in ICICI Prudential Discovery Fund.
Conclusion
This fund is an appropriate option for those who are looking for asset allocation in equity and money market instruments and/or cash during various market conditions. Investors can consider investing a part of their investments in this fund, especially during volatile market conditions.