The Hindu Business Line : ICICI Prudential Emerging STAR Fund: Hold

A host of equity funds with a mid-cap exposure has benefited from the recent recovery in mid-cap stocks. ICICI Prudential Emerging STAR Fund, a scheme which uses the growth style of investing to take exposures to mid-cap stocks, has also seen a sharp improvement in its recent performance, after a sluggish show in the initial months of this year.

The fund has generated a return of about 58 per cent over the past one year, in comparison to a 51 per cent return on the CNX Midcap index over the same period and has fared better than the mid-cap fund category. It has, however, lagged its benchmark index, the Nifty Junior, which registered one-year returns of 65 per cent. Investors can hold in light of improved performance and the reasonable investment opportunities still available in the mid-cap space.

Suitability: The fund’s benchmark is Nifty Junior, which has a focus on larger mid-cap stocks that have the potential to move into the Nifty.

However, in practice, Emerging STAR has actually invested much of its portfolio in under researched mid-cap stocks. The portfolio choices over the past year suggest a relatively high-risk profile that is suitable for investors who can handle volatility in returns.

Performance: Though its returns compare well to the category average on a one-year and three-year basis, the Emerging STAR Fund’s returns have received a boost from a strong recovery in its NAV in recent months. Despite its stron g performance within the mid-cap pack, Emerging STAR has failed to match the returns on its benchmark. The Nifty Junior has been among the top performing indices over the past year, thanks mainly to its significant weightages in banking (27.6 per cent weight in index) and finance stocks (14 per cent).

In contrast to its benchmark, though, the fund has consistently maintained an underweight position to the banking and finance sectors. Mid-cap software, construction and engineering have, instead, been its top sector choices.

The fund’s sector weights, much more diversified than those of its benchmark, have resulted in a portfolio that is less vulnerable to any sector-specific trends.

This may be a desirable attribute from an investment perspective. However, the stock choices have been quite unconventional and leaning towards less-known mid-cap stocks.

About 65-70 per cent of the assets have been consistently invested in stocks with a market capitalisation of less than Rs 5,000 crore over the past year.

In addition to the equity exposure, the fund has consistently allocated a significant proportion of its assets to cash as well as debt exposures.

The fund’s asset base recently crossed Rs 1,000 crore. Very large funds (Rs 2,000 crore-plus) focussed on mid-cap stocks have witnessed a slowdown in performance over the past year. The Emerging STAR Fund is still some way below that threshold.

However, a growing asset size may call for a gradual shift to stocks that fall in the emerging large-cap category, though such a change would not be entirely undesirable as it would bring the fund closer in profile to its benchmark, Nifty Junior.

Fund facts: ICICI Prudential Emerging STAR Fund was launched in October 2004. Its NAV is Rs 32.90.

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