The Hindu Business Line : Prudential ICICI FMCG Fund: Hold

This sector fund has built up a good three-year record and has outpaced its peers. Business conditions also appear favourable to companies focussed on the domestic consumer, and the sector has potential to outperform the broad market over the next one to two years.

However, investing in a sector fund requires timely profit-booking. It may not be suitable for those who plan to pursue a buy-and -hold approach over several years. Such investors can switch from this fund to a diversified equity fund with the flexibility to invest across sectors.

PruICICI FMCG fund has delivered a substantial out-performance of its peers as well as the CNX FMCG index over the past year.

The one-year return on the fund now stands at 132 per cent. The recent performance has also buoyed the three-year returns to an annualised 52 per cent.

The fund's out-performance is attributable to two factors. For one, the fund has not confined itself to conventional FMCG stocks in the food and personal care segments.

Instead, it holds sizeable exposures in stocks such as Trent and Pantaloon Retail, and has also played on the consumer theme by actively investing in paint and brewery stocks.

This has made its portfolio quite different from that of other FMCG funds.

Second, the fund has a predominantly mid- and small-cap focus.

As of August 2005, for instance, stocks with a market capitalisation of over Rs 5,000 crore accounted for less than 10 per cent of the assets.

About 20 per cent of the portfolio, by value, was invested in stocks with a market capitalisation of less than Rs 1,000 crore. This includes companies such as Champagne Indage, Agro Dutch Industries, Dwarikesh Sugar and Heritage Foods.

In the past couple of quarters, the fund has leaned further away from the conventional MNCs in the FMCG space.

Between April and August, stocks such as GlaxoSmithkline Consumer, Hindustan Lever, P&G Hygiene have been trimmed from the portfolio, to be replaced by stocks such as Radico Khaitan, Heritage Foods, Dwarikesh Sugar and ICI.

Over the same period, exposure to personal care companies declined, while breweries and retail stocks have been ramped up.

As of August, the average price earnings multiple of the portfolio was at a stiff 32 times, while the dividend yield was at 1.2 per cent.

The unconventional stock selection has undoubtedly contributed to the fund's impressive performance. But if investors are looking for "defensive" exposures in an FMCG fund, these stocks may not fit that definition.

Fund facts: PruICICI FMCG Fund was launched in March 1999. The fund is small-sized, at Rs.59 crore.

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