If you are looking for mid and small-cap exposure but with a focus on value, then ICICI Pru Discovery
is a good choice. ICICI Pru Discovery
may not be a new-fangled investment idea for you, as it is likely that you saw it in the list of chart busters. Its five-year compounded annual return of close to 12 per cent, places it in the top of the diversified equity fund category.
Yet, it is important that you know why this fund performed the way it did and whether it can continue this feat. This article will therefore focus on the above, rather than discuss only on its returns; the latter now known to all.
How it performed
If you take a look at ICICI Pru Discovery’s
track record, the initial years were nothing to write home about. For three years between December 2004 and 2007, the fund delivered marginally lower than the category average return. Having a value bias did not help it too well in the 2006-07 growth market. In fact, in 2007, the fund delivered only 40 per cent as against equity funds’ average of 60 per cent.
A value theme is never an overnight winner. Stocks with cheap valuations may remain so, for certain reasons, despite underlying sound fundamentals. It may be so as a result of issues in certain sectors or sometimes the potential of certain companies remaining undiscovered.
But 2008 gave ICICI Pru Discovery
a good break. Its value bias helped it contain declines to less than 50 per cent between January 2008 highs to March 2009 lows. That’s better than most other equity funds. The fund stayed with over 90-percent invested in equities in late 2008 even as mid-cap plays such as IDFC Premier Equity went lower than 80 per cent in equities, when markets fell.
Staying invested helped ICICI Pru Discovery
in two ways. One, it was loading up on stocks that turned ‘valuable’ during the correction. Two, it managed an early bird rally gaining 134 per cent in 2009 alone (IDFC Premier Equity managed 102 per cent) as against category average of 96 per cent.
The fund has since been pruning stocks and sectors that lost value, booking profits when valuations rose. This does sometimes result in losing out on the returns race as was the case in 2010 (when some peers outperformed the fund). But this was necessary to keep its value focus.
What it holds
ICICI Pru Discovery’s
value bias holds considerable investment merit in the current market for two reasons. One, the choppy markets, with pockets of under valued stocks, provide opportunities for good stock picks, particularly for funds like ICICI Discovery. Two, quality mid and small-cap stocks of the pre-2008 period are still trading at low valuations as they are hurt by the economic slowdown and high interest rates. A revival in the economy would mean a massive re-rating in these stocks. Not too many equity funds you see will hold stocks such as Rain Commodities, Texmaco Rail Engineering or Voltamp Transformers.
According to its fund fact sheet, the fund has a portfolio of stocks with an average price to earnings ratio of 11.9 times. The CNX Midcap P/E ratio stood at 17.
Portfolio & Performance
ICICI Pru Discovery
pruned exposure to software and pharma in the course of the last one year, when valuations rose. It increased exposure to cyclical sectors such as banks, auto ancillaries and capital goods. It is one of the few funds with less than 2 per cent exposure to FMCG. The fund has two-thirds of its portfolio laden with mid and small-cap stocks of less than Rs 10,000 crore market capitalisation. For IDFC Premier Equity, the same stood at about half of its assets. The latter, has higher exposure to large-cap stocks than ICICI Pru Discovery
An SIP in ICICI Pru Discovery
would have yielded a far higher 20.5 per cent annualized return in the last five years as against 12 per cent annually point-to point. An SIP in its benchmark CNX Midcap would have delivered just 10 per cent.
The fund is managed by Mrinal Singh from February 2011. It was earlier managed by Sankaran Naren, now CIO Equities.