A good defender
If you are looking for a fund that would defend your portfolio well, ICICI Pru Dynamic will fit your requirement. The fund managed a good 27 percent annual return since its launch in October 2002, way ahead of the 14.4 per cent return of its benchmark S&P Nifty. This outperformance is noteworthy as the fund, often times, shifted a good chunk of its assets to debt when equity valuations seemed high.
Although an equity fund, ICICI Pru Dynamic’s mandate allows it to move even 100 percent of its assets into debt or cash or hedge the portfolio using derivatives. The fund takes this call based on market valuations.
If you scout for funds using the toppers’ list of the one-year performance chart, you will not find ICICI Pru Dynamic. Simply, put, this is not a fund for return chasers. This fund will fit your bill if you want to be wary of over-valued market conditions, wish to contain falls in a down market and be able to spot opportunities even the market takes a beating.
But this approach would often mean reducing equity exposure when other equity funds are invested to the hilt or going underweight on a sector that has premium valuations, when peers hold on to it.
This fund can work for you in combination with other equity funds as it can provide market-beating returns and at the same time provide some hedge in a bear market. While we normally recommend SIP route in equity funds, it may not be too risky to take small lump sum exposure to ICICI Pru Dynamic as it tries to time the market for you based on valuations. When markets are expensive the fund will likely move to cash, ensuring that you do not get hurt, even if you time your entry in the market peak.
ICICI Pru Dynamic’s five-year point-to-point returns at 9 per cent annually may seem unimpressive although it is 4 percentage points higher than its benchmark. Yes, it is lower than the 11-percent return managed by established diversified peers such as Quantum Long Term Equity or Reliance Equity Opportunities. But then, ICICI Pru Dynamic’s returns deviate far lesser from its average compared with peers. That means its returns swing less.
For instance, while Reliance Equity Opportunities fell 55 per cent in the 2008 market rout, ICICI Pru Dynamic contained the fall to 45 per cent. This was possible because, by December 2007, the fund had pruned its exposure in equities to 84 per cent. The fund is also adept at upping exposure to equities as seen after the 2011 volatility.
By end 2011, the fund was 92 per cent invested in equities as against 83 percent in June 2011; although market confidence in equities was at a low.
But then, in a market upswing such as the one in 2012, while it beat equity category average, it could not rally as much as top peers. But its returns in 2012 were as much as Quantum Long Term Equity. The fund’s rolling one-year returns over a three-year period was 17 per cent. That is higher than the 11.7 per cent return (rolling basis) managed by FT India Dynamic PE FoF – another fund that takes valuations calls. The latter though, acts more like a balanced fund.
As of January ICICI Pru Dynamic was invested only 77 per cent in equities, net of the Nifty Futures it held. Clearly, it was uncomfortable with valuations in certain sectors. For instance, while most peers are invested about 20 per cent in the banking and finance space, the fund has been reducing its exposure to this segment over the past few months.
Banking and NBFCs accounted for about 13 per cent of the assets in January. Even within this space, the fund held relatively reasonably valued stocks such as Standard Chartered PLC IDR.
Yet another popular sector that did not receive priority was FMCG. The fund held less than 1 per cent in this sector, clearly staying away from the high valuation in that space.
Sectors such as energy and technology instead received more weights; Cairn India being the stock with the top exposure. While the portfolio is large-cap focused, some of the interesting mid-cap picks include Vardhman Textiles, Balkrishna Industries and FDC.
The fund is managed by Sankaran Naren.