ICICI Prudential Value Discovery will complete 10 years this month and has put up an impressive performance over this time. Its 5-year annualised return is 23% and its 9-year return is above 20%.
Launched in August 2004, the very next year Sankaren Naren took over and stayed at the helm for 6 years. In February 2011, Mrinal Singh took over this fund. Since then, we have had the opportunity to evaluate the fund in a downturn (2011) and upturns (2012 and 2013) marred by volatility, enabling us to build confidence in both the manager and his approach.
Singh’s hunt for attractively valued stocks often takes him down the market-cap ladder. It isn’t uncommon for smaller names such as Rain Industries and Career Point to feature in the portfolio. While the fund’s market-cap breakdown isn’t too different from that of a typical peer, Singh does invest a larger portion of the portfolio in small caps.
The manager has shown the willingness to be patient with his small/mid-cap investments, a strategy that gels well with his investment philosophy. However, he doesn’t shy away from aggressively trading large caps to capitalise on short-term mispricing opportunities. This strategy is not without risk and its long-term success will depend in no small measure on the manager’s execution capabilities. On that count, we believe Singh is equipped to successfully ply the strategy.
We identify three areas of concern.
- Singh seeks a combination of attractive valuations and robust fundamentals. The approach can hold back the fund in rising markets. For instance, when valuations are stretched, the fund may have a hard time competing.
- Because the strategy focuses on uncovering attractively priced stocks, being ensnared in value traps is also a risk.
- A growing asset base can pose challenges in the form of having to spread out trades and liquidity management.
It is evident that over shorter time frames, investors need to be able to ride out bouts of volatility and underperformance. However, for risk-tolerant investors willing to be patient and stay invested over a market cycle, the fund can deliver pleasing results.
To read a brief analysis by Himanshu Srivastava, click here.
