Review of 3 ICICI Prudential Equity Funds

May 06, 2021

ICICI Prudential AMC manages assets worth Rs 4.07 lakh crore as on March 2021. The fund house was adjudged the Morningstar Best Fund House Award (Debt)  2021.

We recently reviewed three equity funds from ICICI Prudential Mutual Fund stable. Here is an overview and brief analysis of these funds.

ICICI Prudential Bluechip Fund

  • Star Rating: 4 stars
  • Analyst Rating: Bronze (regular and direct plan)
  • Fund Manager: Rajat Chandak, Anish Tawakley & Priyanka Khandelwal
  • Inception: May 2008
  • Return: 55.62% (1 year), 10.28% (3 year), 13.91% (5 year), 12.66% (10 year), 13.82% (since inception). Return for regular plan as on May 4, 2021.
  • Morningstar Analyst: Nehal Meshram
  • Date of Analysis: March 2021
  • Number of stocks: 63
  • Assets in top 10 holdings: 57%
  • Assets under management: Rs 26,468 crore (March 2021)
  • Investment Style: Large Blend
  • Fund Overview 

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 this could be viewed as constraining, it also reduces the risk of underperformance in the fund. The fund comprises roughly 60-65 stocks, predominantly large cap in nature, with the top 10 accounting for about 55% of the portfolio.

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.

ICICI Prudential Large & Mid Cap Fund

  • Star Rating: 3 stars
  • Analyst Rating: Bronze (regular plan), Silver (direct plan)
  • Fund Manager: Sankaran Naren, Prakash Gaurav Goel & Priyanaka Khandelwal
  • Inception: July 1998
  • Return: 64.15% (1 year), 8.99% (3 year), 12.93% (5 year), 11.88% (10 year), 17.72% (since inception). Return for regular plan as on May 4, 2021
  • Morningstar Analyst: Nehal Meshram
  • Date of Analysis: March 2021
  • Number of stocks: 73
  • Assets in top 10 holdings: 44%
  • Assets under management: Rs 3,726 crore (March 2021)
  • Investment Style: Large Blend
  • Fund Overview 

The managers follow a disciplined investment process with a mix of value and growth styles. With mostly a large-cap bias, they evaluate sectors from a top-down perspective, favouring those with attractive fundamentals and shifting away from ones where they think valuations are stretched. Within the sectors, they use relative valuation parameters to invest in stocks that are attractively priced relative to their growth prospects.

Companies favoured by the investment process typically display quality management, strong financial strength, and growth prospects. The resulting investment style can be best characterised as having a slight growth tilt. Considering Naren’s style of investing, it isn't uncommon for him to trade aggressively and buy/sell stocks from the same sector based on relative valuations.

With the fund's countercyclical approach, he looks to safer stocks during the turmoil, and as the sector outlook improves, he moves into riskier stocks. We believe that as long as Naren helms this fund, he can make the process work. But given that Prakash Goel manages a significant allocation to mid-cap stocks, which are relatively risky, it could witness big declines in returns if not picked up carefully.

ICICI Prudential Multi Asset Fund 

  • Star Rating: N.A.
  • Analyst Rating: Silver (direct and regular plan)
  • Fund Manager: Sankaran Naren, Ihab Dalwai & Priyanaka Khandelwal
  • Inception: October 2002
  • Return: 45.73% (1 year), 9.64 % (3 year), 13.55% (5 year), 12.19% (10 year), 20.97 % (since inception). Return for regular plan as on May 4, 2021
  • Morningstar Analyst: Nehal Meshram
  • Date of Analysis: March 2021
  • Number of stocks/bonds: 63 (stocks), 11 (Bonds), 9 (Others)
  • Assets in top 10 holdings: 61%
  • Interest Rate Sensitivity: Limited
  • Average Credit Quality: AA
  • Assets under management: Rs 11,015 crore (March 2021)
  • Investment Style: Large Value
  • Fund Overview 

ICICI Prudential Multi Asset Fund (erstwhile ICICI Prudential Dynamic) witnessed a change in Morningstar Category, from the flexicap to multi-asset category, consequent to the implementation of SEBI categorisation norms. The fund invests at least 10% across the three asset classes: equity, debt, and REITs/gold. On the face of it, the change looks significant, but the broad contours of the fund strategy remain the same.

The fund follows a disciplined investment process and an active portfolio management approach. Lead manager Sankaran Naren follows an aggressive contrarian strategy and is willing to buy companies that are in the midst of a short-term crisis or transitions but remain fundamentally sound. He continues to dynamically manage the equity and debt portion based on market valuation and maintains the gross equity level of 65%. Taking cash calls is integral to the strategy, but in recent times the manager has not gone beyond 15%. He uses an in-house model based on the historical price/book value of the markets to determine the fair valuation. The model uses the deviation between its assessment of the fair valuation and the market present valuation to indicate the size of the cash call.

The manager evaluates sectors from a top-down perspective, favouring those with attractive fundamentals and shifting away from ones where he thinks valuations are stretched. He studies factors such as fiscal policy, current account deficits, inflation, economic growth rate, and government policies to form his top-down views. While picking stocks, he makes use of relative valuations to invest in large-cap stocks and knocks out stocks with high leverage. The strategy is complex, and the success of the fund depends on skilled execution; on that count, we believe Naren can make the process work.

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