imgbd Fund Focus: ICICI Prudential Focused Bluechip

Bucking the large cap alpha squeeze trend

S. Naren, CIO, ICICI Prudential MF


19th August 2017

In a nutshell

In sharp contrast to Ambit Capital's recent report (Alpha squeeze in large cap funds) which talks of vanishing alpha in large cap funds, ICICI Pru Focused Bluechip has in the same time period, delivered a healthy 4.8% alpha, and Naren remains confident of the fund's ability to continue delivering alpha across market cycles. Large caps continue to be preferred over midcaps especially as the bull market matures says Naren, since history suggests that market returns typically get concentrated into fewer large names as bull markets move into the second and third stages.

WF: We are seeing what may perhaps be the first real correction in markets in 2017. Are you concerned about any local or global factors that can make this correction a deep one or would you say it looks like a much overdue healthy one?

Naren: Currently, we are in the midst of a liquidity-based boom. In a liquidity-based boom, normally corrections are not very deep. So, we see this as a healthy correction unless there are some global events.

WF: The performance data in your presentation shows a 4.8% alpha over the last 7 years, which is in sharp contrast to industry aggregate data provided in Ambit Capital's recent report (Alpha squeeze in large cap funds) which suggests that large cap funds in this decade have delivered 1.5% alpha over 5 year periods and 0 over 10 year periods. What in your view has enabled you to outperform in a challenging environment?

Naren: ICICI Prudential Focused Bluechip Equity Fund has managed to deliver better alpha over market cycles as can be seen from the charts below. We believe the reason for the outperformance when compared to the benchmark and the peer set is owing to the rigorous procedure set in place during portfolio construction.The parameters considered help select better performers among large companies and this strategy has paid off for the scheme, thus far.

We believe, in India, alpha creation across market cycles is possible as equity market is not efficient.

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Five-Year Rolling Return Analysis

82% of the time, since inception (May 23, 2008), the fund's five-year returns have been more than 12%

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WF: For the last 7 months of this calendar year, most fund houses have been recommending large cap funds over midcap funds on grounds of relative valuations. Does this story still hold true? If yes, what is the strategy followed?

Naren: We continue to believe that Large-cap category remains an interesting investment story as compared to midcaps. We also believe that in the second phase or third phase of bull market, large cap or specific themes tend to do better than generalized mid and small cap. It is common to notice globally, bulk of market returns come out of prime/largecap stocks like Facebook, Amazon, Google and the likes. It is a pattern whereby we see narrowing down of number of stocks, towards the second and third phases of a bull market.

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When it comes to the strategy followed...

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WF: We are at cyclical lows on earnings growth and expectations are growing around an imminent recovery in earnings growth. Some observers believe earnings growth usually recovers faster in mid and small caps and then percolates to large caps. Is this observation true and what would be implications on relative valuations in this context, once we start seeing earnings momentum accelerating?

Naren: We believe that earnings growth can come in large caps particularly because earnings have come down significantly for the category. There has been no sign of over-heating in the economy as the corporate profitability is still at a low.

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WF: Financials and auto have been your largest sources of alpha over the last 5 years. What do you see as the likely big contributors in the next 5? What is the current portfolio positioning like?

Naren: Financials remain at 35% of the benchmark. Because it is more the 1/3 of the benchmark, alpha creation can always have to happen in sector like financials. It is not necessary that alpha creation has to happen in certain sectors only, rather it can happen in any of the sectors. But we operate on creating Alpha over a market cycle.

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The stock(s)/sector(s) mentioned in this slide do not constitute any recommendation and ICICI Prudential Mutual Fund may or may not have any future position in this stock(s). Past performance may or may not be sustained in the future. The portfolio of the scheme is subject to changes within the provisions of the Scheme Information document of the Scheme. Data source: Valuefy Solutions; Performance Period: 31 Jul 2012 to 31 Jul 2017.

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

The information contained in this communication is only for the reading/understanding of the registered Advisors/Distributors. All data/information used in the preparation of this communication is specific to a time and may or may not be relevant in future post issuance of this communication. ICICI Prudential Asset Management Company Limited (the AMC) takes no responsibility of updating any data/information in this communication from time to time. The AMC (including its affiliates), ICICI Prudential Mutual Fund (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 communication in any manner.

Nothing contained in this communication shall be construed to be an investment advice or an assurance of the benefits of investing in the any of the Schemes of the Fund. Recipient alone shall be fully responsible for any decision taken on the basis of this document.



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