ICICI Prudential Value Discovery Fund: Fund review

ICICI Prudential Value Discovery Fund, the largest fund in the value-oriented category, has been underperforming its benchmark in the last one year, three years and five years. The scheme has given -5.21 per cent in the last one year, 2.32 per cent in the three-year period and 6.46 per cent in five years. The scheme manages assets worth of Rs 15,219 crore.

The scheme’s performance dipped in 2016 and it slipped to third quartile in the value-oriented category. The underperformance continued and the scheme fell further to the lowest quartile in 2017.

“Our 2017 data has dragged our mid-term performance quite a lot. Our 5-year data looks weak but that has more to do with the 2017 data dragging it down,” said Mrinal Singh, Deputy CIO- Equity, ICICI Prudential Mutual Fund.

Despite the scheme’s recent underperformance, it is interesting to note that the 15-year old fund managed the downside quite well in in 3-, 5- and 10-year periods, shows the data from Morningstar. But does it really matter when a scheme is unable to produce a positive alpha?

Mrinal Singh believes it does: He explained his point with some data points: “If you had invested in Nifty on 1st January 2007, you would have made 50 per cent returns by the end of the calendar year. So, Rs 100 would have become Rs 150. In 2008, the Nifty fell by around 50 per cent. So, Rs 150 becomes Rs 75.”

“So, if you are at 75, you would need 100 per cent returns to go back to Rs 150. What are the chances of you hitting and reaching Rs 150 again? Preserving the capital in equities is a very important. The risk in equities can be as high as permanent loss of your capital,” adds Singh.

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The portfolio of ICICI Prudential Value Discovery Fund shows a tilt towards large caps. It has around 82 per cent invested in large cap stocks. The scheme used to invest mostly in mid cap and small cap segments for the most part of its existence.

“Being conservative is in fact more remunerative in equities because future return is a function of how much capital you can preserve and that is when compounding kicks in,” said Singh.

ICICI Prudential Value Discovery Fund is still a category topper in seven- and 10-year periods.

What should you do?

Some mutual fund advisors believe the iconic scheme has clearly lost some of its charm in the recent past.

“We cannot consider it as a winner. In fact, there are some other funds in the category that have added some value in the recent periods. But we should not hurry up to make a decision. We should give the scheme some more time to perform,” says MS Shabbir, founder and managing director of SenSage Financial Services.

Some advisors opine that only investors who are devoted to value investing should invest in value-oriented mutual fund category. Others are better off in in multi cap schemes with a diversified portfolio. These advisors believe that value-oriented funds might need a longer time to deliver great returns.

“There is nothing wrong with this scheme fundamentally, it is moving along with its peers. In a value fund, there is a high probability that the cycle could run for five to 10 years as well. They could be in a prolonged period of underperformance. Once the cycle returns, the scheme will give us good returns,” says Chokkalingam Palaniappan, Founder, Prakala Wealth Management.

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“Our average holding period has been around 4 ½ to 5 years because our average turnover ratio for most of the times have been at around 20 odd per cent. This time period is the least I would expect. I have seen that if you will be around for anywhere between seven and 10 years with us, the probability of making serious double-digit compounded returns is very high. We have done rolling analysis,” said Mrinal Singh.

For complete interview, read:
Recent performance of Value Discovery Fund due to expensive markets, says Mrinal Singh of ICICI Prudential Mutual Fund



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