AMC Speak 1st November 2012
9 on 10 for this 10 year old !
S. Naren, CIO, ICICI Prudential MF


ICICI Prudential Dynamic Fund is celebrating its 10th birthday. The fund gets 9 on 10 on alpha generation - delivering alpha in 9 out of its 10 years of existence - a remarkable achievement indeed! Naren takes us back to the fund's early days, the lessons learnt through the last 10 years in managing such a difficult mandate, the course corrections that he made along this journey and why he believes this fund is truly an all weather fund. In true Naren style, he is also candid about when you can expect this fund to underperform and what kind of investor expectations this fund is not geared to deliver on.

WF: Congratulations on the 10th anniversary of I Pru Dynamic. This is a fund that charted out a different path for itself and has succeeded very well. Can you take us down memory lane - what was the rationale that led to the creation of this product, how has been the journey over the last 10 years?

Naren: Any product which promises to try and deliver good risk adjusted returns has a good genesis. When the fund was launched, it had a mandate of being able to move to 100% cash or 100% equity. In 2004, the fund manager of this fund believed that the market was reasonably valued and believed in being fully invested in the fund. He believed that the small cap and mid cap part of the market was even more reasonably valued. The fund had a fair amount of small and mid cap. In April-May of 2006, the market fell and the mid cap component of the fund did not do too well.

I took over the fund in 2006 and preserved the fund at that point of time with the same kind of strategy. Then 2007-2009 was a turbulent time given the fund mandate. We handled this by being defensive in terms of sector selection. In 2008 we stayed with the positioning and got reasonable out performance. In 2009 we managed with being defensive and inspite of being invested in small and mid caps which had become dirt cheap managed to get an outperformance against the benchmark.

After 2009 it became clear that we needed to have a much better framework. We sat through and did lot of work in this area and we became very comfortable with our new approach because we realized you have to use the price to book model as the key valuation metric to determine the equity weightage. Then we ensured that we kept our minds focused on taking contrarian views, where warranted - and sometimes even a counter cyclical approach. We looked closely at sectors which are on the down tick, which can go up, and balanced these with exposures to stable, secular businesses. We used such strategies post 2009. When I see our score card for the last 10 years, only in 2007 we had under performance and in all other years the fund has performed well against the benchmark. Of course, the fund mandate also changed to be invested in equity between 65% and 100% rather than 0% to 100%.


WF: What are some of the significant lessons that you and your team have learnt over the years while managing this product?

Naren: Many funds in India were trying to invest when things were looking alright and taking out money when things were looking bad. This led to losses. Our frame work was pretty comfortable, because we were not trying to react to any event but only to price movements. So when the crisis in Greece and Dubai happened, we were buying. Before LTRO also we were buying and after LTRO we were selling. This calls for a certain amount of resolve and that is why this product is so attractive because when you see the beta of this product, it has managed to deliver alpha with very low beta, which is quite good.

Post 2009, when the world moved to a situation where equity returns were not very high, we still had comfort with this fund's approach and are absolutely comfortable asking investors to stay invested through these periods.

WF: What are some of the key points you would like investors to keep in mind when investing in a fund like I-Pru Dynamic? How different should their perception be of this fund as compared to any diversified equity fund? How would you ask advisors and distributors to position this fund? For what kind of investors is this very suitable and for what kind of investors is this not suitable?

Naren: My view is that this fund is inappropriate for a bubble situation which typically happens at a bull market top. Secondly it is not for people who feel that it will generate positive returns at all times. Other than that it is an absolutely great fund and suitable for every investor. The ICICI Prudential Dynamic Fund and the Volatility Advantage Plan, are sister funds and are all weather products. Yes in a bubble they will underperform. In 2007, investors got a return of 41% from this fund even when it underperformed the NIFTY by 14% - but I think 41% is more important. If I see a period from 2003 to 2012, the fund had an underperformance against the benchmark only in 2007, which is remarkable.

WF: Market volatility each passing decade has only increased. Does this mean that the product category in which Dynamic operates is set for faster growth than the normal diversified equity funds that usually stay fully invested?

Naren: I think our own belief from January 2010 is that volatility as a category will become bigger than any other category in equity. In the next five years, this will be a key category. The reasons for it is the problem of debt, deflation and deleveraging in the western world; the current account deficit, fiscal deficits and inflation problems in India and the credit growth and the other imbalance issues in China - are all macro issues that still need to be resolved. Therefore there are many reasons for volatility which is not going to go away soon.

Finally when we reach a point where you think from here on it is an uptrend, you would find that this fund has done better. When you are in a rapid uptrend, a more aggressive fund would give the best return but it depends on whether the investor wants to be invested in an aggressive fund.

WF: What percentage of Dynamic is now invested in equities? How has this changed over the last couple of months where we have seen a neat market rally?

Naren: If you see the month of September, we would be at one of our lower levels in the last one and half years in equity. We were at 79% in equity and 21% in liquid debts. The good thing in India is that 21 % liquid debt yields something like 7%- 8%. Post September, the markets have gone down and so the equity weightage has gone up. Our mandate for the fund is that we can go as low as 65 % in equity.

WF: Finally Naren can I ask you, your outlook on market : the last time we spoke you had mentioned that oil is something that you need to watch out for very closely. With oil not going through the roof after QE3, is it time to call for a new bull market or is it too soon to make such a bold prognosis ?

Naren: Any step to cut fiscal deficit outside disinvestment would be treated positively by the market. Markets reacted positively to the diesel price hike. If in the next two months, the government is able to come up with steps which will reduce fiscal deficit outside disinvestment, it will again give a positive turn to the market. Today the market has two sets of valuation. One set of valuations in sectors like FMCG are so high that there is no uptrend possible in terms of valuation. On the other hand, except about 10 to 15 stocks, the market is still reasonably valued. But for those reasonably valued stocks to get re-rated, fiscal deficit needs to go down even more. We are in a moderate returns phase in equity which suits the strategy of I Pru Dynamic.

WF : Heartiest congratulations Naren, once again, on this important milestone for I Pru Dynamic. Here's wishing you and the fund an even more successful next 10 years !