3 things to note about ICICI Prudential Bluechip

By Morningstar Analysts |  28-05-20 | 
 
  • Fund: ICICI Prudential Bluechip
  • Category: Equity: Large Cap
  • Fund Managers: Anish Tawakley, Rajat Chandak
  • Star Rating: 4 stars
  • Analyst: Nehal Meshram
  • Analyst Rating: Bronze
  • Date of Analysis: March 2020

A well-considered and repeatable investment process with a benchmark conscious approach.

The portfolio managers ply a benchmark-conscious strategy, and sector weightings are aligned to those of the IISL Nifty 100 Index, subject to a deviation of plus or minus 5%. Hence, the top-down approach has little relevance. They use the in-house large-cap model portfolio as the initial reference point when choosing stocks. Although the managers also use the firm's internal fair value approach and the alpha alert, the model portfolio remains the most important part of the security-section process.

Within a sector, the managers perform business analysis to identify the best ideas. In addition, they use free cash flow/enterprise value ratio (three-year average) as an appropriate parameter, along with price/book value and return on equity, among others, to determine a company’s fair value. Typically, the fund will invest only in the top 100 stocks by full market cap.

The managers have a quality bias when choosing stocks: They favour companies with robust business models, strong entry barriers, and the ability to scale up without eroding profit margins. However, they are not averse to investing in companies that do not fulfill all their qualitative criteria if the stock offers a trade-off against valuations. This way they follow a barbell strategy and either end up paying more for high-growth stocks; and at the same time focus more on attractive valuations.

The portfolio reflects a true-to-label large-cap fund with sector weightings aligned to the index.

This is a true-to-label fund and maintains about 80%-90% of assets in large-cap stocks. The portfolio has historically been well balanced across sectors. The portfolio managers follow a benchmark-conscious approach and align portfolio sector weightings to those of its benchmark, IISL Nifty 100 Index. While it could be viewed as constraining, it also reduces the risk of underperformance in the fund. The fund comprises roughly 50-60 stocks, predominantly large cap in nature, with the top 10 accounting for about 45% of the portfolio.

While benchmark names tend to find a place here, some off-benchmark stocks like Bharat Forge, Mangalore Refinery and Petrochemicals, ICICI Securities, and LIC Housing Finance among others also feature in the portfolio. Despite having about 40% invested in the financial sector, the fund continues to remain slightly underweight in the sector versus its index. The portfolio managers have reduced exposure in PSU banks such as State Bank of India and Bank of Baroda as they find valuation to be a big concern. On the contrary, they have increased allocation in Private banks like HDFC, Axis, Kotak. Technology is the second-largest sector in the fund, with top names like Infosys, Tech Mahindra, and HCL Technologies. The portfolio carries an underweighting in the Pharma sector.

Cash levels typically remain below 10%, in line with the strategy to remain fully invested at all times.

Well-experienced team, but the capability of the managers needs to be tested over a longer term.

Tawakley is currently the lead manager and the head of research. We believe the lead manager has the capability to run this strategy, but it remains a watch point as he lacks relevant fund management experience.

The fund has witnessed a lot of change in lead managers over the last few years.

It was managed by Manish Gunwani from February 2012 to July 2017.

Later, CIO Sankaran Naren and Rajat Chandak took the reins of this fund. However, Naren's role was temporary, and Anish Tawakley joined Chandak in managing this fund in September 2018, when Naren relinquished his responsibilities.

Team stability has been a concern as the fund witnessed the exit of Gunwani, Vinay Sharma, and George Joseph. However, because the fund house is one of the largest teams in the industry and because of its collaborative management style, it has not materially affected the workflow.

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