Our confidence in this fund’s prospects is reduced following manager Prashant Kothari’s exit.

In Jan 2012, manager Prashant Kothari, who managed this fund since its inception in May 2008, exited the fund company. We think his exit is a big loss for both this fund and the fund company. Kothari was one of the longest-serving members at ICICI Prudential and had developed expertise across sectors. He had built an impressive track record across funds he ran at the fund company. The fund is now helmed by Manish Gunwani effective 19 Jan 2012. Gunwani was previously a portfolio manager with ICICI Prudential’s portfolio management services (PMS) division since June 2010 and had built a brief but impressive record there.

The investment strategy for this fund revolves around the manager identifying his best 20 investment ideas in the large-cap space. Gunwani uses the fund house’s in-house large-cap model portfolio as his initial reference point when choosing stocks. He performs competitive analysis to identify the best picks within the sector, and applies a qualitative filter wherein companies without robust business models, strong entry barriers, and the ability to scale up without erosion of profit margins are preferred over others. Like Kothari, Gunwani plies a benchmark-conscious approach and aligns the portfolio’s sector weights to that of the benchmark index S&P CNX Nifty. This can restrict his ability to pick stocks and allocate weights in an unconstrained manner; on the other hand, it also lowers the risk of relative underperformance, given the high concentration levels in the portfolio.

In our opinion, a key positive for the fund was the presence of Kothari—he displayed fine skill in executing the strategy. Gunwani has analyst experience spanning more than eight years, which should help him with the stock selection. However, he is fairly untested in portfolio management, having run funds for only 18 months now. Other concerns also persist: The fund’s success has been accompanied by a surge in assets, which may pose liquidity issues going forward. The erstwhile manager Kothari was already using Nifty futures to a small degree to provide liquid market exposure. An increasing use of derivatives can reduce the fund’s distinctive profile.

Finally, we note that there have been several key exits in the investment team since 2011—this does not bode well for the overall stability in the team. The same has also led to an increase in the workload for some members in the team. This can limit their effectiveness, in our view. Hence, in light of these developments, we are downgrading the fund to a Neutral rating.