When the markets are falling, ICICI Prudential Dynamic is the fund to go with
The very nature of this fund ensures that it will have excellent defending capabilities during market downturns. Its market strategy causes it to reduce exposure to equities when the stock market is high and get fully invested when valuations are low as the risk return trade off is better and opportunity is greater.
The fund manager has the discretion to go fully (100%) into equity or liquidate his holdings to zilch (0%). Over the past few years, his equity holdings dropped to a low of 76 per cent. And, true to mandate, that was not in 2008 when the market collapsed but in July 2009 when the rally began to gain in momentum.
Besides the asset allocation, this portfolio stands out with regard to its defensive nature. "As the valuation of a theme expands and enters into a bubble territory, we tend to be underweight in it which helps the fund mitigate downside risks well," explains Naren. That would explain why he is underweight on Domestic Consumption. He is also underweight on interest rate cyclicals given the interest rate and inflation scenario. But he is betting on Energy, which he finds to be a more conservative avenue than Commodities. The fund manager has tremendous flexibility not only to dynamically shift between asset classes but even between market caps. And this leeway he uses to the hilt. It started as a large-cap fund but joined the mid-cap rally in 2003 to once again take on a large cap tilt from mid-2006 onwards. Despite mid caps rallying, its large cap exposure currently stands at 69 per cent.
Frankly, the fund's performance has not always been impressive. When compared with its benchmark, it has done suitable well for itself by hitting a rough patch in 2007 and being a fairly average performer in 2009. When compared to its category average, its track record is spotty. It has undoubtedly had a few good years, but stood out in 2008 by limiting its fall to just 45 per cent (category average: -54%). But this is exactly what one should expect from such a fund. "Over a five-year period, this conservative fund has a better potential for outperformance than other funds. While it may demonstrate moderate performance during market rallies, due to great downside protection it neither will correct significantly, thereby averaging the returns over the long term," says Naren.
