The Hindu Business Line : ICICI Pru Focussed Equity Fund: Large-cap expectations

With funds such as Emerging STAR, Discovery and the Fusion series in its portfolio of products, ICICI Prudential Mutual Fund has had a strong tilt towards mid-cap stocks in its fund portfolios. Of the equity funds in its fold, ICICI Pru Growth is the only one with a clear large-cap bias. It is in this backdrop that the ICICI Pru Focussed Equity Fund is being launched.

The fund: An open end offering, the key differentiating feature of this fund is that it plans to have a focussed portfolio of large cap stocks. The portfolio will be drawn only from ‘high conviction picks’ and the fund will have concentrated exposures to these stocks. The fund targets a portfolio of about 20 stocks, as long as the asset size remains below Rs 1,000 crore. The concentrated strategy has been framed with the following factors in mind:

Potential to generate Alpha from being over weight on certain high conviction picks.

The portfolio could take exposure to any theme and has the flexibility to choose between stocks across themes / sectors / investment styles.

The fund believes that risk of higher concentration can be more than compensated by higher returns.

Investment proposition: The fund takes the view that large-cap stocks would be better placed to weather volatility, no matter whether the market is an up or down-move. It points out that the S&P Nifty has registered lower volatility in returns than the CNX Midcap Index, over both bullish and bearish market conditions over the past seven years.

The fund also provides back-tested data to prove that a concentrated portfolio of 20 stocks drawn from the BSE-100 basket has outpaced this index in 9 of the past 10 years, with an average excess return of 22.4 per cent a year.

While a large-cap focus should make for less volatile returns, investors need to bear in mind that after the recent “flight to safety”, large caps are trading at a significant premium in valuations over mid-caps. They may go on to deliver consistent returns, but investors in such a portfolio of large cap stocks should expect only moderate returns from current levels. Mid-caps, though more risky, may offer higher return potential as well.

The performance of diversified equity funds in India does suggest that concentrated portfolios have tended to deliver better performance than diversified ones. However, such portfolios rely to a greater extent on the stock selection skills of the individual fund manager, as each stock in the portfolio may have a big bearing on the fund’s overall returns. Investors in this fund will have to closely track any changes in the management team.

Pros and Cons: The combination of a compact portfolio and a stringent focus on large-cap stocks may work in the fund’s favour. The return potential that the fund may be sacrificing by focussing on large-caps alone, may be made up by its overweight bets (if they click) on each of its stock ideas.

However, for investors who are looking only for funds with a large cap focus, existing funds such as the DSP ML Top 100, Birla Sun Life Frontline Equity and HDFC Top 200 come with an established as well as good track record. However, these funds may offer more diversified portfolios than would be the case with the ICICI Pru Focussed Equity Fund.

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