'With special situations' fund, ICICI Prudential on new path

Majority of equity mutual funds in India follow the growth, quality or growth at a reasonable price styles of investing. ICICI Prudential Asset Management Company is hoping to try out a different strategy with a new special situations fund (SSF). Named ICICI Prudential India Opportunities Fund, this open-end scheme will be sector- and market cap-agnostic.

Globally, special situation investors try to outperform markets by swooping in on companies that are beaten down due to one-off negative events such as restructuring, debt distress or demerger. But ICICI Prudential plans to run this fund with a broader mandate and will capitalise on three types of special situations.

One, it will look for a temporary crisis in good companies due to events such as a strike, regulatory issues, management change or takeover that lead to buying opportunities. Selling pressure on the Maruti Suzuki stock in 2012 due to a strike at its Manesar plant was one such event.

Two, government or regulatory actions can lead to special situations for some sectors. The fund believes that demonetisation turned out to be good for insurance and NBFC stocks.

Three, exaggerated worries about the impact of global events sometimes cause Indian stocks to suffer disproportionate falls. For instance, the battering received by cash-rich commodity companies in India in 2015-16 on China slowdown worries, made for a good entry point into these stocks.

So, how is this different from that used by the value or contrarian funds in the market, which also look for out-of-favour stocks? Sankaran Naren, Executive Director and CIO of ICICI Pru AMC, explains, “In value investing, you buy a stock that is at a discount to its intrinsic value. But special situations can arise in stocks that are not trading at a discount too. For instance, most value investors will not consider Nestle India as an addition to their portfolio. But during the Maggi controversy there was a special situation opportunity to buy it. Similarly, in contra investing, you do the opposite of what others in the market are doing. But in special situations investing, one need not do that. For instance, if NBFCs are in crisis, I may not buy NBFC stocks but other sectors that are likely to benefit from this.”

Naren, however, cautions that investors in this fund should be prepared for a concentrated portfolio as it may hold multiple exposures in a single sector. This fund will also be making a sizeable number of active calls which can peg up its short-term volatility.

The fund will be benchmarked to the Nifty 500 index and managed by Sankaran Naren and Roshan Chutkey. The new fund offer is open from December 26, 2018 to January 9, 2019. Earlier, Fidelity, L&T MF and Aditya Birla Sun Life have managed SSFs which were later merged or restructured with different mandates.

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