ICICI Prudential Dynamic Fund: BUY. Deft switches between equity and debt

Are you a conservative investor who is worried that the markets will continue to remain iffy? You could invest in ICICI Prudential Dynamic Fund. A consistent performer with a large-cap bias, the fund has managed to beat its benchmark, the Nifty 50, by between 3 and 5 per cent over one-, three- and five-year periods. Over a longer period of five years, the fund’s performance is on par with other large-cap-oriented funds, such as SBI Magnum Equity and ICICI Pru Top 100.

The fund contains downsides in falling and volatile markets by moving to cash and debt in place of equity. These tactical calls are taken purely on quantitative basis. If the price to book value ratio of the market indices is low, the fund raises equity holdings; if high, it raises cash/debt. The approach has clearly paid off as, over the last five years, the fund has managed to beat the benchmark 85 per cent of the time on a one-year rolling return basis.

In the bear market of 2011, as the Nifty 50 dropped almost a fourth, the fund managed to contain its losses by a fifth. In January 2011, it brought down equity exposure to 83 per cent, upping cash holdings. But it upped equity investments to 93 per cent in December, thereby setting up for a strong show in the rally that followed in 2012.

During the bull run of 2014, the fund saw a 12 per cent rise in equity allocation between April and May. This paid off as the fund gained 9.5 per cent while markets rallied 7.6 per cent. Playing on the economic recovery theme with an eye on the election results in 2014, the fund increased exposure to State Bank of India while buying into metal stocks, such as Hindalco, Tata Steel, SAIL and JSW Steel during this period. It also bought into ONGC, Indian Oil and Larsen & Toubro.

The fund usually maintains a diversified holding of between 50 and 60 stocks across various sectors. Over the last one year, Power Grid Corporation of India continues to be the top holding with a 10 per cent allocation. During this period, there has not been much change in the top three sector holdings which continue to be in private sector banks, software and power, with a little more than a third allocated to these sectors. As of February 2016, the fund holds around 60 stocks with 90 per cent of its assets in equity. In addition, it has a minor foreign equity exposure of about 2 per cent in Cognizant Technologies and holds around 6.5 per cent in cash and debt. From December 2014, the fund has maintained a large-cap slant of around 85 per cent, with the remaining 15 per cent allocated to mid- and small-caps.

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