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ICICI Prudential Discovery
ICICI Prudential Discovery, a mid-and small-cap fund, is currently one of the leading value funds in the country. Started in July 2004, it has enjoyed a good run over the past five years amid difficult market conditions. It is benchmarked against the CNX Midcap Index and, currently, has a corpus size of Rs 2,534.46 crore.
Fund performance
The fund is ahead of its benchmark by a wide margin of 12.01 percentage points on a year-to-date basis (13 November). It has also beaten its benchmark over the one-, three-, and five-year horizons. The fund has been consistent in calendar year performance as well: over the past five years, it has beaten its benchmark by a respectable margin every year (see graph). It has even provided protection to its investors in the declining markets of 2008 and 2011.
Investment approach
Mrinal Singh, the fund manager of ICICI Pru Discovery, relies primarily on a bottom-up approach to stock-picking. Valuation plays an important part in determining the stocks that enter or exit its portfolio. The fund manager also takes into account factors like the quality of management, existence of a business moat (prevalence of competitive advantage), quality of financials, and sustainability of earnings while picking stocks.
When the markets overreact to certain developments, the fund manager tries to capitalise on the resultant discrepancy between price and intrinsic value. "If we believe that a stock's difficulties are temporary, we consider investing in it," says Singh. The fund manager favours a buyand-hold approach. "As long as the returns are commensurate with the patience we have displayed, we are happy owning a stock," says Singh.
Portfolio characteristics
Equity count: The fund currently has 69 stocks in its portfolio. This is much higher than the average of 47 for the mid- and small-cap category.
Stock and sectoral concentration: The fund's allocation to the top three, five, and 10 stocks in its portfolio is lower than the respective medians for the category. This also holds true for sectoral concentration.
All the three criteria mentioned above— number of stocks, sectoral and stock concentration— demonstrate that the fund runs a diversified portfolio. Singh uses diversification as a parameter for containing risk.
Turnover ratio: The fund's turnover ratio in October 2013 was 43%, which was much lower than the average of 81.47% for the mid- and small-cap category. In the last one year, too, the fund's turnover ratio has averaged a rather low 48.08%. This means the fund manager avoids churning the portfolio too much. Says Singh: "I wait for the right price before buying a stock. Once this happens, I build a position and hold it till I feel its intrinsic value has been achieved."
Expense ratio: This is a relatively low-cost fund. Its current expense ratio is 2.21%, which is lower than the average of 2.51% for the mid- and small-cap category.
Cash holding: The fund avoids large cash calls, with its allocation to cash averaging 3.65% till October this year.
Risk-adjusted return: The fund's riskadjusted return (measured by Treynor ratio and Sharpe ratio, and calculated over the past three years) is higher than the median for the mid- and small-cap category. To contain risk, the fund restricts exposure to a single sector to 20%, and avoids highly leveraged businesses.
Fund manager
Mrinal Singh took charge of the ICICI Pru Discovery Fund in February 2011. It has done well under his charge. He is assisted by Atul Patel.
Should you invest in it?
One reason for you to invest in this fund is its consistent track record over the past five years. The other is that you will be able to diversify your portfolio on the basis of investment style. Since most funds are growth-oriented, adding a value-oriented one will make your portfolio more robust. Growth and value funds are known to do well in different market conditions. Value funds also typically offer better downside protection in declining markets.
However, since the fund belongs to the mid- and small-cap category, which is inherently more volatile, you should have limited exposure to it (70-75% of your equity portfolio should be allocated to large-cap funds and 25-30% to mid- and small-cap funds).
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