ICICI Prudential Business Cycle Fund : Reading economic indicators

ICICI Prudential Mutual Fund has launched a new fund offer (NFO) — ICICI Prudential Business Cycle Fund. This is an open-ended scheme with an investment theme based on various phases of economic activity such as recession, recovery and growth.

The NFO closes on January 12.

Investment strategy

The fund follows a top-down approach for stock selection. Higher weightage is given to factors such as economic and sectoral indicators, monetary policy response of central banks, growth and inflation than to the fundamentals of the company. Because, the fund house believes that markets are going to be volatile going ahaed and opportunities exist in being nimble and shifting between sectors as macro environment changes.

The fund house has created four investment themes — ‘piggy backing’, ‘blue sky’, ‘dark cloud’ and ‘rider’. Based on the business cycle prevalent, domestically as well as globally, the fund house will choose a suitable investment theme.

In a ‘blue sky’ scenario, when the global and domestic economic growth is strong, the sector exposure of the portfolio will be tilted towards global cyclicals including metals, mining, oil sectors, and domestic cyclical sectors such as consumer durables, banking, auto, capital goods and infrastructure.

In case of a ‘dark cloud’ scenario when, both global and domestic economic activity is weak, domestic defensive sectors such as telecom, power, utilities and FMCG will be preferred.

The ‘rider’ theme will be activated in case of weak global growth but strong domestic growth. Here, sectors in the domestic cyclical industry will be chosen.

Lastly, in the ‘piggy backing’ theme that comes into picture in case of strong global growth and weak domestic growth, sectors under global cyclicals, domestic defensives, and export- oriented sectors such as information technology pharmaceuticals and auto ancillaries will be considered.

Once the sectors are decided, the stocks within the industry will be picked based on various financial parameters at the discretion of the fund manager.

The current business cycle is expected to be tilted towards the ‘rider’ phase, according to the fund house, since domestic growth is expected to improve further, and global growth is expected to be neutral due to the second wave of Covid-19 infections in select developed economies.

The fund will invest across sectors out of the Nifty 500 companies and will be benchmarked against the Nifty 500 TRI. The scheme is also expected to have exposure to international equity to an extent of up to 15 per cent of the portfolio depending on the business cycle.

Peers

There’s only one another business cycle scheme in the Indian MF space — L&T Business Cycles Fund.

As on November 30, 2020, the fund has invested significantly in sectors including commodities (31 per cent of portfolio), financial services (21%) and manufacturing (23%).

But the performance of this fund has not been satisfactory with recorded returns for one-, three- and five- year periods at 5.6 per cent, -1.88 per cent and 6.33 per cent, respectively, as against its benchmark — S&P BSE 200 TRI — returns of 10.12 per cent, 7.97 per cent and 11.69 per cent.