Fund Focus: ICICI Prudential Balanced Fund

Strong contender in balanced funds category

S. Naren, CIO, ICICI Prudential MF

5th December 2016

In a nutshell

Think of I Pru and hybrids, and the mind immediately recalls BAF - the flagship volatility buster that's become an iconic brand in the industry. Beyond BAF, there's another winner in the I Pru suite of hybrids - its conventional Balanced Fund, which has been notching up credible performances Y-o-Y. Naren takes us through the fund strategy, the difference between equity strategies of BAF and the Balanced Fund, and his outlook on debt and equity markets especially when we have so many moving parts locally and globally.

WF: Markets are experiencing a renewed bout of volatility now, as they digest the US elections, currency implications from a rising US dollar, demonetization and impending roll out of GST. What is your call on debt and equity markets over the next 12-18 months in light of all these moving parts?

Naren: Markets are likely to be volatile in the near term, but from a two to three year perspective, the Indian equity space is favorably poised for an up move. We are of the view that growth in earnings supported by increased capacity utilization is likely to help markets edge higher from current levels. Hence we are recommending investors to opt for dynamic asset allocations funds which can make the best of both the debt and equity universe. Investors with higher risk appetite can consider infrastructure from a medium to long term perspective.

With respect to debt, post the recent demonitisation move and if inflation drops to below 5% and remains there, a rate cut of 25-50 bps cannot be ruled out. Therefore, it is likely that in the shorter term, yields are likely to come down further. From six to twelve months view, there is merit in continuing to hold duration position. However, from a three year perspective, a large part of the interest rate rally has been harvested and therefore it would be prudent to opt for accrual products which don't rely on interest rate movement to generate a significant part of the return.

To sum up, the outlook for both debt and equity looks positive.

What do percentiles and their colours signify?

Fund performance is typically measured against benchmark (alpha) and against competition. Performance versus competition is measured through percentile scores - ie, what percentage of funds in the same category did this fund beat in the particular period?

If a fund's rank in a year was 6/25 it means that it stood 6th among a total of 25 funds in that category, in that period. This means 5 funds did better than this fund. In percentile terms, it stood at the 80th percentile - which means 20% of funds did better than this fund, in that particular period. If, in the next year, its rank was 11/26, it means 10 other funds out of a universe of 26 did better than this fund - or 38% of funds did better than this one. Its percentile score is therefore 62% - which signifies it beat 62% of competition.

Most fund managers aim to be in the top quartile (75 percentile or higher) while second quartile is also an acceptable outcome (beating 50 to 75% of competition). What is generally not acceptable is to be in the 3rd or 4th quartiles (beating less than 50% of competition). Accordingly, we have given colour codes aligned with how fund houses see their own percentile scores. Green colour signifies top quartile (percentile score of 75 and above), yellow or amber signifies second quartile (percentile scores of 50 to 74) and red signifies 3rd and 4th quartile performance. A simple visual inspection of colour codes can thus give you an idea of how often this fund has been in the top half of the table and how often it slips to the bottom half. A great fund performance is one which has only greens and yellows and no reds - admittedly a tall ask!

WF: Since 2010, YoY performance of ICICI Prudential Balanced Fund has been robust - in terms of alpha generation as well as performance vs peers. Fund performance in YTD CY16 has come back strongly after a relatively muted CY15. What are the strategies that you have put in place that have enabled this performance?

Naren: 2015 was the year when the midcaps had done very well but our balanced fund has always been large cap focused and hence the performance. We believe that over the medium term, balanced fund is the product to invest in.

In terms of portfolio positioning, the fund is significantly overweight on Power as we believe that the sector stands to benefit with the fall in interest cost, thereby reducing the ultimate cost of power generation which increases the probability of off take by the discom. Telecom, minerals and chemicals are the other bottom up picks which we are overweight on.

Another interesting detail of the fund has been …

WF: You have a strong balanced fund and your flagship BAF - how would you advise distributors to position both these funds and choose the appropriate one for different customer segments?

Naren: ICICI Prudential Balanced Advantage Fund is a more conservative product than our balance fund. So when markets do well we expect balanced to actually do better and when markets are more volatile and deliver lower absolute return, we expect BAF to do better because of its defensive positioning. The key difference is in terms of equity exposure. In ICICI Prudential Balanced Fund, the equity exposure is maintained between 65-80% based on P/BV model while in case of ICICI Prudential Balanced Advantage Fund, the equity levels can be between 30-80%.

WF: In terms of portfolio strategy on the equity component, is there a difference between your Balanced Fund and Balanced Advantage Fund?

Naren: Balanced fund is run with a blend of top down and bottom up philosophy and we do take sector deviations in benchmark and since the fund is likely to be more aggressive in stock selection and in sector preferences than BAF.

WF: Around 70% of the equity component in your Balanced Fund is in large caps, and the balance in midcaps. Is this a reflection of current relative valuations or is the fund mandated to have such a proportion between large and mid caps?

Naren: The Scheme looks at a blend of large and midcap stocks. Large cap stocks represent enterprises with established track record while the mid and smaller businesses are the ones which show long term growth potential. The current relative valuation is the reason why we have a large weightage in large caps. If midcaps were to become relatively attractive it is possible for us to increase the midcap weightage in this fund.

WF: During the last quarter (Jul-Sep 16), exposure to banks went up initially and then was reduced, while in software, it was reduced initially and is now being increased. Can you please help us understand this better - are these a function of sectoral calls or only bottom up stock specific decisions?

Naren: We look for sectoral exposure where there is a potential. Banking as a sector has been volatile since returns given have been varying over time. As a result, our sectoral variations do change based on the relative attractiveness of different sectors.

WF: The debt component seems a story of two parts - almost 65% of debt exposure is in the liquid and highly safe space of gilts and cash, while the balance which is in corporate bonds seems to be more geared to higher coupon AA names rather than safety oriented AAA names. What is the thinking behind this strategy?

Naren: The debt composition in the fund is largely based on our outlook towards duration. Over the last two years we were running a longer duration fixed income securities with credit rating AA and above, which offer reasonable accrual. The fixed income component endeavors to earn reasonable addition in wealth by taking well-researched exposure to private corporate securities.

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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