We think the return of Sankaran Naren to this fund’s helm is a positive development.

Following manager Sanjay Parekh’s exit, there has been another round of restructuring at ICICI Prudential. Parekh has been replaced by Sankaran Naren. Naren previously ran the fund from Sept 2006 to Feb 2011, before relinquishing fund management responsibilities and assuming the role of CIO. We think his return to the fund's helm is a positive development.

Naren will have support in the form of Mittul Kalawadia, who has been named comanager. Kalawadia is a research analyst who will assist Naren with investment ideas from the small/mid-cap segment. However, we have learned from our interaction with the fund company that Naren will be solely responsible for making all investment decisions on the fund.

Naren maintains that he will operate the same investment strategy that he did on his first stint--relying heavily on sector plays and cash calls. He will evaluate sectors from a top-down perspective, favoring those with attractive fundamentals and shifting away from ones where he thinks valuations are stretched. He will deploy a rules-based approach using the historical price/book value of the market to determine the fair valuation, and in turn tweak cash allocations.

On his watch, the fund built an impressive track record. It clocked an annualised growth of 16%, outscoring both its benchmark index S&P CNX Nifty and the category average by 6 percentage points per annum. Having said that, some aspects of the strategy need to be noted. Naren takes sector bets and aggressively trades his large-cap investments; the equity component’s turnover ratio stood at 197% as of March 2010 and 131% as of March 2011. Such tactics are not without risk.

The elephant in the room is the strategy of taking cash calls. For one, it is difficult to pull off cash calls consistently. Then, there has been a change in approach--until Sept 2009, cash calls were taken intuitively; since then, a model-based approach has been used to determine cash levels in the fund. While Naren did a good job with the former strategy, these are early days for the latter. Admittedly the model-based approach worked well in 2010 and 2011; but then, the latter isn’t surprising given that broader markets shed roughly 25% during the year. We need to evaluate the model-based strategy over a longer time period, before confidence can be drawn from it. At a parent level, there have been a number of exits from the investment team over the last 12 months, which is a bit disconcerting.

In his first stint, Naren showed a flair for making the strategy work, a feat he is capable of repeating. This is by no means a bad fund; indeed, as its track record suggests, the fund has held investors in good stead. However, our conviction is restrained by the aforementioned factors. Hence for now, we retain the Neutral rating.