Our Call. ICICI Pru Dynamic: BUY

The markets have had a relentless run over the last year, with the Sensex and Nifty moving up 29 per cent each. The party has been merrier for small- and mid-cap stocks, which have skyrocketed.

But while stocks have rallied based on the expectations of a turnaround in economic growth and hence better days for corporate India, growth signals continue to remain mixed. Global events such as the US rate hike could also trigger a correction. So, the time appears right to bet on equity funds that can contain the downside and handle volatility well.

ICICI Prudential Dynamic is one such fund, which switches between equity, debt and cash to offer investors a defensive bet. Even in a falling (such as in 2008 or 2011) or a volatile (2013) market, ICICI Pru Dynamic has proven to be dependable, faring much better than its benchmark — the Nifty — in containing losses.

Thanks to its approach of raising the equity allocation when market valuations are low, the fund comfortably beats both the benchmark and its peers during rallies.

In the last one year for example, the fund gained about 42 per cent, on a par with other established diversified equity funds such as Quantum Long-Term Equity and UTI Equity, and more than Birla Sun Life Frontline Equity. Over three- and five-year periods, its returns are about 6 percentage points more than the Nifty. It has a rolling return of 86 per cent in the last five years.

ICICI Pru Dynamic adopts a defensive approach in asset allocation, turning to debt and cash when equity valuations appear high. The valuation-based approach also helps the fund deftly redeploy money into equity at the right time. Over the years, despite going heavy on debt and cash to the extent of 15-20 per cent of its portfolio, the fund has rarely lost out on any rallies.

The conservative strategy is also visible in its choice of stocks. Despite having a mandate that allows it to straddle large-, mid- and small-cap stocks, the fund sticks to large-caps (market capitalisation of ₹7,500 crore and above).

These stocks normally constitute 70-75 per cent of its equity holdings.

The fund’s latest portfolio reiterates this character well. From about 85 per cent at the beginning of 2014, equity holdings have now come down to 79 per cent. Although banks and software remain the fund’s top sector choice, in the last four months, its exposure to the cyclical banking space has been brought down, while holdings in the defensive software space have moved up. ICICI Pru’s top bets include proven large-cap names such as ICICI Bank, Infosys, Wipro and Power Grid Corporation. It is playing the mid-cap space cautiously, steadily booking profits in many multibaggers such as Balkrishna Industries, Kalpataru Power Transmission, and Redington India.

The money pulled out of equity has been deployed mainly in long-term sovereign bonds, with bond holdings increasing steadily to about 17.5 per cent now compared with 6 per cent at the end of June 2014. With long-term bond yields expected to move downwards in the next one year, a rally in bond prices will benefit the fund.

The NAV per unit of the growth option is ₹179.04.

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