Small caps were the darlings of the market in 2014, and had closed out the valuation gap vs their larger peers in last year's run up. The correction over the last few months however has made them come right back into value zone, feels George, which has prompted ICICI Prudential to come back with a Value Fund now, after the Growth Series of last year. George believes that current valuations, the turning of the interest rate cycle, the slump in global commodity prices and the present negative sentiment towards small caps offer rich value pickings in the small caps space. Read on as George takes us through why he believes the ICICI Prudential Value Fund Series 8, with its focus on small caps, is a well timed offer.

WF: You launched your Value series in 2013 and continued it into the first part of 2014, after which you launched your Growth Series. What is the significance of launching the next edition of the Value Series now, instead of continuing with the Growth series?

George: As per our value investing framework, an asset class offers value when there is fear, lack of flows, low past returns and low valuations in the market. Within the equity segment, small caps are at a juncture that matches with our overall framework of recommendation. Therefore, we are launching ICICI Prudential Value Fund - Series 8 which will be aimed at capturing investing opportunities in the small cap space.

WF: Mid and small caps had a huge run up in 2014. What is the investment argument for small caps? Are the low hanging fruit already taken in this space?

George: Currently, Foreign Institutional Investors (FII) Flows have turned negative for the past two months and there is uncertainty owing to global and domestic factors. In fact, Small Caps are trading at a discount to Large & Midcap peers and their last one year returns have been muted.

Also, Small Caps historically tend to follow a negative correlation with Interest Rates. With the interest Rates having peaked out this segment presents a reasonable investment opportunity. Of late, Small Caps have also shown a negative co-relation with oil price movement. Therefore, oil price correction could augur well for Small Caps.

WF: Your presentation says that performance data indicates potential of a sustained rally in small caps. Can you please elaborate this point?

George: Generally, Small caps tend to more volatile and therefore warrant caution. Strong bottom up research process helps in identifying potential winners. There could be bouts of volatility in markets but picking companies with strong business models at the right entry points in terms of valuations, could generate good returns on a long term basis.

WF: What is the significance of the correlation between oil prices and small caps? Is there an underlying logic to the correlation or is it purely co-incidental?

George: Commodities price correction helps Indian economy in general. Small companies are most vulnerable to input cost movements and so the fall in commodities prices, especially crude oil, helps to reduce the input costs for most companies in this category. Therefore a good correlation is visible on a long term basis.

WF: Many fund managers prefer to have more names in their small cap portfolios, as diversification is seen as a way to manage incremental risk in this segment. In this context, why have you decided to go in for a high conviction, 20-25 stock portfolio?

George: We are launching ICICI Prudential Value Fund- Series 8 as a close-ended fund to ensure that fund manager has a good visibility for the stipulated period. One does not have to worry about redemptions and can concentrate on building a good portfolio. In general, open ended small cap funds have to worry about liquidity from the investor's redemption perspective and for this very reason we still do not have an open ended small cap fund in our product suite. We endeavour to invest in 20-25$ high conviction companies which we believe is a reasonable diversification of risk rather than investing in a wide range of companies where the conviction level is not as high.

$ The number of stocks provided is to explain the investment philosophy and the actual number may go up or down depending on then prevailing market conditions at the time of investment

WF: In casting the portfolio today, do you see the best bets coming out of special situations or purely future growth prospects?

George: We endeavour to capture companies from three different baskets - a) Deep value picks with free cash generating companies trading at 3-5 years payback period, which could include some special situation cases too. b) Compounding growth companies with reasonably attractive valuations c) Cyclically beaten down companies which are at the lower band of the normalised earnings multiple. There are a number of picks in the small cap space that fit into the aforementioned criteria; and, we would ensure a robust bottom up research backing to invest in them.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

The information contained herein is only for the reading/understanding of the registered Advisors/Distributors. All data/information used in the preparation of this material is specific to a time and may or may not be relevant in future post issuance of this material. ICICI Prudential Asset Management Company Limited (the AMC) takes no responsibility of updating any data/information in this material from time to time. The AMC (including its affiliates), the Fund, ICICI Prudential Trust Limited (the Trust) and any of its officers, directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. Nothing contained in this document shall be construed to be an investment advise or an assurance of the benefits of investing in the any of the Schemes of the Fund. Sectors/stocks mentioned in the article do not constitute any recommendation and the Fund through its schemes may or may not have any future position in these sectors/stocks. Recipient alone shall be fully responsible for any decision taken on the basis of this document.

Share this article