The Hindu Business Line : ICICI Pru Discovery: Sell

The fund’s return over this period has slipped to a negative 1 per cent against the benchmark Nifty return of 11.6 per cent. ICICI Pru Discovery’s ‘value investing’ mandate has also not provided relief on the downside, what with the fund losing close to 34 per cent on a year-to-date basis, higher than the declines recorded by benchmark indices Sensex/Nifty.

Investors can consider exiting the fund; its continuing bias for mid- and small-cap stocks, even as there appears ample scope for value picks among blue-chip stocks, limits the scope for a quick revival in performance.

Investors can instead consider investments in large-cap funds such as HSBC Equity or HDFC Top 200, which have not only contained downside risks better but hold potential to gain quickly from a broader market revival.

Background: With a mandate to invest in stocks that either trade at attractive valuations or hold high dividend yield potential, ICICI Pru Discovery started off with flying colours after its launch in July 2004. By the end of December 2005, the fund had an annualised return of over 70 per cent since its inception.

Laden with stocks that had an average price earnings multiple of 14, the valuation of the portfolio then appear attractive against the Sensex P/E of 19 (historical basis).

The current portfolio too sports an average P/E of 14, similar to that of the Sensex. In other words, the fund’s portfolio of largely mid- and small-cap stocks showcases a valuation similar to that of the Sensex.

But the question is whether the portfolio holds value. With the effects of a macro slowdown and funds crunch threatening mid and small companies, such stocks may underperform under current circumstances.

While ICICI Pru Discovery has increased its stake in large-cap stocks (market capitalisation of over Rs 7,500 crore), from 15 per cent in April 2008 to about 25 per cent now, stocks below market cap of Rs 3,000 crore still form 50 per cent of the portfolio.

A good part of them have either been retained or accumulated over the last year, thus dragging returns. Large-cap holdings such as ICICI Bank and Sterlite Industries also appear fraught with uncertainty about their earnings growth.

Performance: After its worst ever quarterly performance between January and April 2008, ICICI Pru Discovery has contained declines better in recent months — a trend observed in other funds as well.

Over a three-year period the fund’s annualised return of 9.3 per cent fares poorly against such value-oriented peers as Templeton India Growth (19.6 per cent) and Tata Equity P/E Fund (17.5 per cent).

While the peers too have not contained downside very well, their large-cap laden portfolio has helped them perform well during rallies.

For investors in Discovery, the opportunity loss has been significant.

Portfolio: The fund’s high holding in pharma and IT has provided some cushion. However, stock holdings such as Birla Corporation, Kesoram industries, and Vardhaman Textiles, held for over a year now, have shed as much as 50 per cent of their value.

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