ICICI Prudential Asset Management Company remains staunchly bullish on the stock markets, at least for the next two years. Their recent decision to allow investors to rollover their holdings in their close-ended 'Value Fund' series bears testimony to that.
The fund house is of the view that an increase in capacity utilization, global low-to-negative interest rates, the impact of monsoons and government policies will lend a fillip to stocks in the medium term. Their in-house perspective is that the Economic Cycle is still away from its peak, and we are still amid a recovery phase.
In November and December of 2013, ICICI Prudential had launched two close ended, diversified equity funds (Value Fund Series -1 and Value Fund Series -2) with a hard lock in of three years. The rationale behind launching the two funds was simple -markets were broadly undervalued, with the Nifty Price to Earnings ratio standing at roughly 16X at the time, and the Price to Book Value ratio at 2.82 times. Additionally, mid-caps were trading at a 30 per cent discount to large caps.
In hindsight, thetwo launches were well timed. Series 1 and 2 have returned stellar absolute returns of 81 per cent and 82 per cent respectively, beating the benchmark handsomely over the past three years. Interestingly, the fund doesn't have a growth option, forcing investors into the dividend option - presumably to provide them with the comfort of regular income streams from a fund which otherwise has no interim scope for liquidity. The two funds have combined assets of close to Rs. 1,300 Crores as on date.
A stock picker's delight, both value funds have been instrumental in generating Alpha by identifying a slew of multi-baggers: Motilal Oswal Financial Services (576 per cent), Sadbhav Engineering (319 per cent), Bharat Electronics (261 per cent) and Himatsingka Seide (332 per cent) are a few instances of the same.
In line with their largely bullish outlook, the AMC has decided to allow investors to extend their holding period by a further two-year duration. The cut-off dates for submitting an extension request are 7th November for Series 1 and 5th December for Series 2. Doing so will lock in investor funds for another two years.
While there's a case to be made in favour of overvaluation (the Nifty is trading at 23X today), the looming threat of a potential global selloff, and the merits of adopting a general risk-off approach; there are a few reasons why a rollover in this fund may be warranted for risk loving investors who can afford to wait for another two years.
Firstly, the fund strategy itself has changed. Starting off with a largely midcap bias in 2013, it has gradually migrated to following a predominantly large cap strategy. Series 1 and 2 hold 56 per cent and 65 per cent of their portfolios in large cap stocks as on date. A 'measured approach'towards the more volatile basket of mid cap securities is planned for the next two years.
Second, the fund is a bottom up, stock picker - making it an ideal pick in the current scenario where a broad rally seems unlikely, to say the least. If the current market rally is to continue, opportunities will certainly be more stock specific. Funds that mimic other funds, or 'spray and pray' equity funds that spread themselves thin by investing into too many stocks are quite likely to end up in the latter half of the performance charts. The fact that the fund is market cap and sector agnostic allows the fund manager enough flexibility to cherry pick holdings from across the board.
Third, the fund's mandate allows it to reduce net equity levels to as low at 30 per cent during market peaks, lending an automatic cushion to investors. Given that there's a fair chance of turbulence going forward, the close ended structure might actually end up working in favour of the typically mercurial retail investor. Moving in and out of the markets during volatile markets can be extremely damaging.
Last but not the least, let's not forget that the man at the helm of both funds is S. Naren, an outstanding Fund Manager with a stellar track record in value investing. This is a fund that structurally plays to his strengths, as he isn't one to trade stocks aggressively; preferring to make high conviction bets and patiently waiting for them to pay off.
If you're an investor in either of the Value Funds, it would be worthwhile to consider a rollover. As always, do ensure that your overall portfolio has a well-balanced asset allocation - current times do call for prudence and balanced split between equity and debt assets. There's no reason why the Value Fund series shouldn't continue to be a core part of your equity holdings for the next two years.
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