The Hindu Business Line : PruICICI Discovery: Hold

PruICICI Discovery has fallen off the top of the performance charts, after consistently figuring in the upper quartile since its launch in August 2004. Since the market peak on May 10, the fund has shed close to 30 per cent of its value.

Its performance is, however, on par with that of other funds with a value investing strategy. Investors who have an ongoing systematic investment plan with the fund need not discontinue it. Given its higher allocation to mid-caps, though, fresh exposures need not be considered by conservative investors.

"Value" funds seek to invest in stocks that trade at attractive valuations vis-à-vis the market on parameters such as earnings multiple, price-to-book value or dividend yield. Such funds often focus on sectors that may not necessarily be in fancy. Experience suggests that such a strategy tends to pay off in the long term. Investors will, however, have to stay with such funds through ups and downs to reap benefits. As Discovery has done better than most other value funds, investors can retain their holdings. The portfolio, too, appears to have potential.

PruICICI Discovery predominantly invests in stocks that trade at a price-to-earnings multiple lower than the market. For instance, stocks in its portfolio trade at average earnings multiple of 10.5, significantly lower than the Nifty. Ideally, stocks that trade at lower valuations relative to their fundamentals should be more resilient in the event of a correction than more expensive stocks.

Discovery's performance has, however, suffered during this correction period, which could be attributed to the following reason. One, since January, it has enhanced its allocation to mid-cap stocks or stocks with a market capitalisation of less than Rs 2,000 crore. Mid-cap stocks, which now account for almost 50 per cent of the overall portfolio, are more vulnerable to market corrections than large-caps. Second, in recent months, it has increased its exposure to the banking and pharmaceutical sectors, which received a pounding in this correction period.

However, its performance is better than peers such as Templeton India Growth Fund and Birla Dividend Yield Plus.

Its record since inception even beats that of the MSCI (Morgan Stanley Capital International) India Value Index. Even in the recent correction, its decline is in line with the index.

Portfolio overview: The portfolio is densely packed with about 70 stocks. The fund follows a diversified investment strategy with the top ten holdings accounting for about a third of the portfolio. State Bank of India represents the only bluechip stock in its top ten holdings. The top three sectors are consumer non-durables, mainly sugar stocks, pharmaceuticals and banking. Together, they account for about 30 per cent of the assets.

Prominent holdings such as Kesoram Industries, Exide Industries, EID Parry, Gujarat Industries Power, Jindal Steel and Power, TNPL and Aditya Birla Nuvo have potential to deliver returns over the long term.

Fund facts: PruICICI Discovery was launched in August 2004. The fund had an asset base of Rs 965 crore as on June 30. The fund manager is Mr Sankaran Naren.

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