Management
Sankaran Naren, portfolio manager, has run ICICI Prudential Infrastructure since October 2005. Naren joined ICICI Prudential Mutual Fund in October 2004 and has spent 18 years in investment management field. 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.
We believe ICICI Prudential is a strong name in the asset management business. The firm has successfully built investor wealth in the long-term.
Strategy
This is the largest equity fund managed by ICICI Prudential Mutual Fund. The fund follows conservative investment approach and mainly invests in large capitalized companies with a growth bias. The portfolio manager also invests in mid- and small-sized companies in a meaningful way, which can influence its performance.
This is a theme based fund and invests primarily in infrastructure related sectors such as cement, power, telecommunications, oil and gas, construction, banking, etc. The fund does not invest in fast moving consumer goods, automobiles, pharmaceuticals, information technology and media industries.
We believe the management diligently follows the Fund’s investment approach. However, any rally in the ignored five industries may hamper the Fund’s relative performance.
Performance
ICICI Prudential Infrastructure was launched in August 2005. Thanks to its superior performance, the fund’s size almost tripled from 14 billion rupees (1,400 crores) it collected during the new fund offer period to 39.5 billion rupees (3,950 crores) in July 2009.
The fund delivered strong relative performance during the last three-year period through the end of July 2009. The fund’s trailing return was better than 98% of its large-cap category peers.
No doubt, the fund performed well over the longer period, however, its performance, especially during the last one year period has caused us a concern. During the last one-year period through July 2009, the fund has generated 4.6% return, ranking at 100th position out 129 funds available in this category. The fund’s benchmark during the same period gained 7%.
We also looked at the fund’s performance against other infrastructure funds available in the market. Over the three-year period, the fund clearly stood out from the competition, however, during the last one-year period, its performance has suffered resulting in the fund’s falling into the bottom quartile.
We believe the portfolio manager’s cash calls, especially during the last three-months, have dragged down the fund’s one-year returns. During May 2009, the Fund had 43% of its assets in cash. That’s the significant number amounting to 14.5 billion rupees (1,455 crores).
We think the market timing exercise (before the outcome of Parliament elections) dampened the fund’s return in May 2009 as it underperformed its benchmark by over 500 basis points (5%). The manager, however, quickly cut cash exposure in June to benefit from rally, which began after the clear cut victory of the Congress led UPA alliance during in May.
As of July 2009, the fund had 16% in cash, which is still a significant number and any rally in equity may impact its performance further.
During the last one-year through July 2009, the fund’s exposure to Oil and Natural Gas Corp (ONGC) and Reliance Industries, hampered its performance, owing to decline in crude oil prices, led by slowing global economy and declining demand.
The manager, in fact, exited out of ONGC in February 2009 when crude oil prices bottomed out and started inching up. He added ONGC shares back in June 2009, however, missed the sharp rally in stock, which gained 70% (crude oil increased by $20/barrel) during March to May 2009 period.
The fund’s exposure to the consumer discretionary sector, particularly not owing automobile stocks – Mahindra & Mahindra, Maruti Suzuki and Hero Honda, which gained over 100% during the last one-year period, dampened its relative performance. The fund’s strategy is not to invest in automobile sector as the investment management team believes this sector is not a part of infrastructure theme.
In contrast, the fund’s exposure to financials sector contributed to its relative performance. Within financials, the manager avoided real estate stocks, particularly DLF and Unitech, which declined owing to a slump in their revenues, benefited the fund’s performance.
In terms of risk, the fund was relatively ranked in the top deciles, resulting in “High” Morningstar Risk. We would like the fund better if its risk falls at least in line with its other peers.
Overall, the fund performed well in terms of risk-adjusted return, during the three-year period through July 2009 and was five-stars rated by Morningstar.
Costs
This is one of the least expensive funds. Its expense ratio was 1.86%, compared infrastructure peers average of 2.24%. The low expense ratio was primarily due to an increase in the fund’s assets.
Stewardship
The portfolio manager does not invest in this fund, however, has investments in ICICI Prudential Discovery.
Conclusion
We believe the fund’s performance during the last three-month period led to underperformance during the last one-year period. There were a few investment mistakes made due to market timing activity. The large fund size still causes us some concern, however, since it invests mostly in large-cap names (therefore no liquidity risks), investor would be better off by investing for at least four-five years horizon.