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Citrus Analysis: Short but sweet track record
Thu, Jul 12, 2012
Source : Sanjay Kumar Singh, Citrus Interactive

Started in May 2008, ICICI Prudential Focused Blue-chip Equity is a large-cap growth fund. Currently it has a corpus of Rs 3,841.48 crore, which makes it the sixth-largest fund in the diversified equity category.

While the fund’s mandate allows it to invest in the top 200 companies by market capitalisation, the greater part of the portfolio is invested in the top 100 stocks.

The fund remains more or less fully invested: at any given time 92-97 per cent of the portfolio is invested in equities. It doesn't take active cash calls. While such a fund may tumble more in a downturn, the advantage of this approach is that it is unlikely to miss out on a sudden upturn in the market.

As for sector allocation, the fund’s mandate allows it to deviate only +/- 5 per cent from the weights of the various sectors in its benchmark, the S&P CNX Nifty. Says Manish Gunwani, the fund manager: “The idea behind this stipulation is that you generate alpha through bottom-up stock picking rather than by taking macro bets.”  

The fund mostly invests in growth stocks. Says Gunwani: “With a buy-and-hold philosophy, you can let compounding work in your favour by buying into growth stocks. At the same time, if we find great value stocks, we will buy them.”

Fund performance

2012. The fund is uncharacteristically lagging behind this year: year-to-date (July 9, 2012) it has given a return of 12.88 per cent, which is lower than the return of its benchmark, Nifty (14.98 per cent).

Over the one-year horizon, the fund has given a return of -2.38 per cent, outperforming its benchmark (-6.07 per cent).

Over the three-year horizon, it has given a return of 16.95 per cent, which is more than 7 percentage points better than the return of its benchmark (9.25 per cent).

Consistent performer. The fund’s calendar year-wise performance shows that it has been remarkably consistent. In 2011, it gave a return of -16.46 per cent, beating its benchmark by more than 8 percentage points (-24.90 per cent).

In 2010, it rose 27.07 per cent, beating its benchmark (17.95 per cent) by more than 9 percentage points.

In 2009, the fund’s return of 87 .52 per cent surpassed its benchmark (71.46 per cent) by above 16 percentage points.

For a fund to beat its benchmark by such margins in all the three calendar years of its existence is a remarkable feat.

Downside protection. In a falling market (2011) the fund was able to provide sound downside protection to its investors.

Portfolio characteristics

Number of equity holdings. The fund runs a concentrated portfolio. Currently it has 29 stocks in its portfolio, which is lower than the median for the diversified equity category (38).

Since its inception, the fund has always run a tight portfolio, with the median number of stock holdings over this period being 20. The minimum was 16 at the very beginning (June 2008). In recent times, the equity count has gone up to 25-30 with the increase in the fund’s corpus.

Sector concentration. In keeping with the concentrated nature of its portfolio, the fund's exposure to its top three sectors stands at 43.72 per cent, higher than the median of 35.22 per cent for the diversified equity category. The same holds true for the fund’s concentration in its top five and 10 sectors.

Company concentration. The fund’s concentration in the top three companies within its portfolio is 23.61 per cent, higher than the median of 19.66 per cent for the diversified equity category. Its concentration in the top five and 10 companies within its portfolio is also higher than the category median.

Both sector and company concentration point to the fact that ICICI Pru Focused Blue-chip is among the more concentrated funds within the diversified equity category. A more concentrated fund does imply higher risk.

Turnover ratio. The fund’s turnover ratio in May was 62.2 per cent, lower than the peer-group median of 75.5 per cent. Over the entire duration of its existence, the fund’s average turnover ratio has been 75.67 per cent, which is not high. This is a relatively low-churn fund, which adheres to the buy-and-hold philosophy.

Expense ratio. An expense ratio of 1.83 per cent, much lower than the category average of 2.26 per cent, adds to the fund’s attractiveness for investors.

Risk measures. The fund’s standard deviation of 1.08 is marginally higher than the category median of 1.06. Its beta of 0.874 is also marginally higher than the median of 0.799 for diversified equity funds. This is in keeping with the nature of the fund.

Risk-adjusted return. The fund’s Treynor ratio of 0.0656 is higher than the median of 0.0436 for the peer group. Its Sharpe ratio is 0.0530, which is again higher than the median of 0.0340 for the peer group. These numbers attest to the fact that the fund’s returns have justified the risks inherent in its portfolio.

Portfolio strategy

2009. This was the year of the bulls: the Sensex rose 76.35 per cent but the mid- and small cap index turned in scorching returns, rising 102.40 per cent and 119.34 per cent respectively.

The fund enjoyed a superb run, rising 87.52 per cent in the first complete year of its existence. The outperforming sectors of 2009 were BSE Metal (214.73 per cent), BSE Auto (194.97 per cent), BSE IT (124.21 per cent), BSE Capital Goods (95.03 per cent), BSE Consumer Durables (93.48 per cent), BSE Bankex (79.60 per cent), BSE PSU (74.89 per cent) and BSE Oil and Gas (69.99 per cent).

The fund’s top exposures were IT-software (9.4-14 per cent), private banks (8-13.65 per cent), public banks (3.35-8.24 per cent), and oil exploration (5.87-7.63 per cent)  

Explaining why the fund chose to stay away from Metals, the year’s top-performing sector, the fund manager says: “Global macroeconomic developments have an impact on the outlook of metal stocks. Those developments are fairly difficult to predict. So this fund has been equal-weight or underweight on this sector most of the time.”

2010. In 2010 the Nifty rose 17.95 per cent but the fund beat it by a wide margin, rising 27.07 per cent. That year large-cap stocks outperformed mid- and small-cap stocks. The fund had an exposure of 88 per cent to large caps at the beginning of the year which rose to 91.96 per cent by the end. Exposure to both cash and derivatives stayed in the single digit during the year.

The year’s top-performing sector indexes were BSE Consumer Durables (63.77 per cent), BSE Auto (33.86 per cent), BSE Health Care (33.36), BSE IT (30.74 per cent), BSE Bankex ((30.54 per cent) and BSE FMCG (30.15 per cent).

The fund’s highest allocation was to private banks (13-14 per cent) and IT-software (12-14 per cent). Exposure to public sector banks was raised from 7.77 per cent at the beginning of the year to 11.09 per cent by the end. Another sector to which the fund manager raised his exposure was tractors – from 3.64 per cent at the beginning of the year to 6.32 per cent by the end. Exposure to refineries was lowered from 8.46 per cent to 6.14 per cent.

2011. In a declining market, when the Nifty fell -24.90 per cent, the fund managed to stem its loss to -16.46 per cent.

That year the mid-cap (-34.78 per cent) and the small-cap index (-43.63 per cent) fell more than the large-cap index (-24.83 per cent). The fund’s predominantly large-cap exposure (88-92 per cent) worked to its advantage.  

At the start of the year the fund had an exposure of 3.2 per cent to cash, which rose to 9.67 per cent by November. Exposure to futures (derivatives) was in the range of 8-10 per cent in the first part of the year but was brought down to about 5 per cent by December.

In 2011 only the BSE FMCG index turned in a positive performance (9.27 per cent). All the other sectors were in the red: BSE Health Care (-13.20 per cent), BSE IT-15.62 per cent), BSE TECk (-16.52 per cent), BSE Consumer Durables (-18.13 per cent), and BSE Auto (-20.30 per cent).

The fund’s top exposure during the year was to IT-software (13.64-15.62 per cent). Exposure to private banks fell from 12.28 per cent to 9.90 per cent during the year. Though pharma sector occupied only 2.11 per cent of the portfolio at the beginning of the year, its weight rose to 9.01 per cent by the end. Refineries (8.37 per cent) and power generation/distribution (7.59 per cent) were two other important holdings in the portfolio.  

According to Gunwani, “The fund outperformed in 2011 because it became defensive by positioning itself into sectors such as Pharma at the correct time. Metals and banks suffered a lot that year. While we did have an exposure to banks because we could not deviate too much from the sector weights of the benchmark, we had minimum exposure to commodities. In auto we had minimum exposure to high-beta names such as Tata Motors. That worked in our favour.”

Explaining the fund’s outperformance in 2009, 2010, and 2011, the fund manager says: “A lot of the outperformance came about because we identified the right theme at the right time. We bought into the consumption story and stayed away from the infrastructure story. Between 2003 and 2008 we had a massive infrastructure boom. By the end of this period, consumption stocks had become very cheap while infrastructure stocks had become very expensive. The fund positioned itself correctly by buying into high-quality consumption stocks – stocks with good cash flow, low leverage, and proven management. Broadly this theme worked in all the three years.”

2012. Year-to-date the fund is up 12.88 per cent, whereas its benchmark is up 14.98 per cent.

This year mid- and small-cap stocks (up 22.96 per cent and 22.93 per cent respectively) have rallied more than the Sensex (which is up only 13.37 per cent).

This year the fund’s allocation to large caps has been in the range of 92-94 per cent. Its exposure to cash has ranged from 3.5-7.2 per cent. A very small portion of the portfolio is in derivatives.

YTD rate-sensitive sectors have stolen a march over defensives: BSE Bankex is up 34 per cent; BSE Realty is up 26.82 per cent; and BSE Capital Goods is up 25.83 per cent. Defensives like BSE Consumer Durables and BSE FMCG follow with returns of 22.04 per cent and 21.68 per cent respectively.    

Currently the fund has a mix of rate-sensitive sectors like private banks (21.22 per cent) and automobiles (two & three wheelers, 5.26 per cent) and defensives such as cigarettes and tobacco (7.40 per cent) and pharma (4.97 per cent) in its portfolio. IT-software (14.92-15.11 per cent) and refineries (6.70 per cent) are among its other large bets.

Explaining why the fund has lagged behind in YTD performance, the fund manager says: “In January the market went up around 10 per cent. We lagged by 3-4 percentage points in that month. Our portfolio was defensive at that point of time, mostly in pharma and FMCG, whereas the stocks that went up were the high-beta stocks.”

As for whether he plans to move more decisively into rate-sensitive sectors in future, the fund manager says: “We are not convinced that the macro-economic cycle has turned decisively yet. But the direction is right: inflation is falling, interest rates may not fall but are unlikely to go up either, and globally commodity prices have been stable for the last three months. So incrementally things are improving. But we have not seen enough evidence to be decisively in rate-sensitive sectors yet.”

Explaining his current bullishness on telecom, the fund manager says: “While there are concerns about regulations, the sector will consolidate and incumbents with economies of scale, like Bharti and Idea, will emerge winners. As the industry consolidates, revenue per minute will improve, and this will lead to better margins.”

As for IT, another large bet, the fund manager believes that India’s high current account deficit of around 4 per cent will keep the currency weak. As one of India’s largest export sectors, IT will benefit from the weak currency. The stable outlook of the US economy will enable the sector to grow at 10-15 per cent in dollar terms (though it may not grow at 25-30 per cent, as it did earlier). Moreover, even large-cap IT stocks are now reasonably valued, he says.

Fund manager changed

This fund was managed by Prashant Kothari between June 2008 and December 2011. The current fund managers, Manish Gunwani (January 2012) and Atul Patel (June 2012), have taken over the fund only recently. It remains to be seen how well the fund performs under the new team.

Finally, the fund runs a concentrated portfolio that increases its level of risk (compared to its more diversified counterparts). But it invests entirely in large caps which are inherently less volatile than mid- and small-cap stocks. It also churns its portfolio less. Astute stock-picking has produced an impeccable track record over the four years of the fund’s existence.

You may consider this fund for your core portfolio.      
 
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