ICICI Prudential Income and ICICI Prudential Income Opportunities have a fair amount in common. Besides being from the same fund house, they also fall into the Intermediate Bond category and each sports a 4-star rating.
The funds are managed by Manish Banthia, who took over after Avnish Jain’s exit in September 2013. A positive is the presence of CIO-Fixed Income Rahul Goswami in the team. An experienced and skilled campaigner, his expertise in reading the macroeconomic environment and taking duration calls is a great asset.
Senior fund analyst Ishwar Chidambaram has assigned a ‘Neutral’ rating to each of these funds.
ICICI Prudential Income
Banthia plies an active investment style. He is driven by the quest for value with a contrarian bent. He is keenly attuned to market expectations and developments while constructing the portfolio.
Duration plays and spread analysis are the mainstays of the investment strategy. He combines macroeconomic factors such as the credit and interest rate cycles, economic growth rate, inflation, and borrowings data with short-term factors such as overnight rates and liquidity conditions while plotting the portfolio’s duration. He will invest in varying maturity buckets in his quest for attractive yields.
Banthia trades freely among corporate bonds, gilts and cash based on relative valuations. Taking credit bets isn’t a big part of the strategy. This reinforces the portfolio’s liquidity and we believe this tactic gels well with the overall strategy given the emphasis on adding value through duration plays.
The investment process is commonplace enough and its success will be driven by skilled execution. However, investors should note that given the investment style, the fund could expose them to higher volatility than the typical peer. Hence, it is important that they be patient and remain invested through periods of underperformance.
While the fund has delivered a good performance under Banthia’s watch, the performance has come largely in an environment of falling yields. We are yet to witness how he runs the strategy in an increasing rates scenario.
ICICI Prudential Income Opportunities
This fund follows an approach that is too strait-jacketed. Our concern stems more from the fund’s strategy, which we believe offers investors a rather limited opportunity for outperformance.
The investment strategy centers on the likelihood that interest rates will fall over a three-year period, or thereabouts. In keeping with this, Banthia will maintain the portfolio’s average maturity at roughly six to seven years.
With a view to keeping the portfolio liquid and to steer clear of any downside arising from a credit default, Banthia invests only in AAA-rated securities and holds them to maturity. The emphasis on safety can be gauged from the high allocation to paper from public sector undertakings.
The trouble with this approach is that it leaves the fund with a rather narrow window to deliver, that is, when interest rates are on the decline. Conversely, if the interest rate cycle doesn’t play out as expected--if interest rates rise or if they are range-bound--then the strategy could well struggle.
The buy-and-hold approach means Banthia is unable to execute his active investment style. Sadly, the strategy doesn’t allow the team to play to its strength. The fund may also struggle relatively in a lower interest rate environment as peers will have the ability to position themselves on the longer end of the yield curve versus this fund.
On a positive note, the fund's lower total expense ratio enhances its appeal to some extent. However, it will take significantly more to make the fund a solid offering. Unless there is evidence to suggest that the manager can add value within the constraints of the strategy, our conviction in its prospects will remain muted.
