2004, ICICI Prudential’s most popular scheme – Value Discovery Fund completes
ten years. The fund has delivered 25% CAGR since its inception. Its fund
manager Mrinal Singh talks to Cafemutual about what has helped the fund live up
to its expectations and his future strategy.
With the elections behind us, what are the next triggers for the market?
The overhaul of certain regulations, policy announcements across key sectors and their implementation by the new government could augment the economy. Another factor which will help the market in the medium-term could be softening of inflation.
ICICI Pru Value Discovery Fund completes ten years in 2014. Tell us more about the investment strategy of this fund.
ICICI Prudential Value Discovery follows the classic principles of value investing - buy stocks at discount to their intrinsic value. The scheme focuses on identifying value stocks that are likely to transform into tomorrow’s market leaders resulting in potential capital appreciation over time.
The fund conducts a rigorous process to identify fundamentally strong and well managed companies which are undervalued. The fund manager may also resort to contra investing strategy which involves selection of stocks that are out of favour at a certain point but have the potential to do well over time owing to factors such as strong fundamentals, future turnaround in the business cycle and revival in economic growth.
How do you filter stocks in this fund?
While investing in companies, we use several screeners like primary research, bottom-up rigour and meetings with company management. The scheme, through its process of discovery, seeks to identify stocks whose prices are lower, relative to their historic performance, earnings, book value and have cash flow potential.
How is this fund different from other small and mid-cap fund in the market?
The fund is distinctively positioned as a value fund in the industry, having a track record of a decade. The strategies that we employ include investing in a well-diversified portfolio of stocks based on attractive valuations in relation to earnings or book value, capturing special situations and contra calls, along with bottom-up approach and multi cap exposure for the fund.What themes/sectors is the fund betting on currently? What themes will play out well in the next three years?
We expect recovery in domestic fundamentals as economic growth picks up and reforms gather pace. We would be leveraging on economic revival; domestic cyclicals offer a potential upside in the next 3-5 years.
Which sector bets has helped the fund over the history of its journey?
The scheme’s overweight exposure to software, auto and auto ancillaries sectors helped it outperform the benchmark in the past three years. Further, its underweight exposure to power and construction sectors prevented the dent in the performance in the past three years.
How do you mitigate risk in this fund during volatile times, especially when the market is in a bear phase?
The fund mitigates risk through diversification and by reducing concentration both at the sector and stock level. The scheme does not take too much exposure to small-cap stocks and generally restricts itself to quality mid-cap stocks. Its value focus and, to some extent, and its ability to spot potentially underperforming sectors have aided its out-performance.
Markets have run up quite sharply. Do you think there is still some steam left in mid and small cap companies?
We believe that over the medium to long term, mid and small cap companies offer a reasonable potential. Currently, market looks fair at the current earnings; however, there are many industries where capacities have not been utilized fully. For instance, in the capital goods industry, plants are being utilized at 50-60% capacities, due to regulatory & environmental clearances or lack of demand.
In future, we believe that the regulatory and environmental clearances are expected to move in the next 3-5 months. As far as the demand issue is concerned, in a country like India over 2-3 years phase, the demand will grow. Therefore, capacity utilization in many industries is expected to increase; and when at the same amount of capital, the capacity utilization increases, with operating leverage working, there could be a multiplier effect on the bottom-line of companies.
Going ahead, how do you plan to sustain the performance of the fund?
First and foremost, the fund will remain true to its label - following the value investment philosophy. We would continue with a disciplined investment approach to build a diversified portfolio of stocks having reasonable potential to deliver value to investors over the long-term.