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ICICI Prudential Discovery Fund

ICICI Prudential Discovery is a mid-cap value fund that was launched in July 2004. The fund currently has a corpus of Rs 2,630 crore (June 30, 2013). It is benchmarked against the CNX Mid-cap Index. There are very few value funds in our industry and ICICI Prudential Discovery is one of them.

Performance

The fund has consistently outperformed its benchmark in all the periods. However, the fund has lagged its category average significantly in the YTD and the past one –year, time horizon. This could be because of the battered mid-cap space. Since, inception the fund has given outstanding CAGR returns of 20.22 per cent. Had one invested in the index during this period then the investor would have got an annualized return of only 15.39 per cent.

			YTD*		1 Year		3 Years		5 Years		Since Inception
ICICI Pru Discovery		-10.72		5.25		4.01		16.44		20.22
CNX Midcap		-13.67		-0.13		-3.35		6.99		15.39
Average		-7.25		7.40		1.56		8.59		-
Rank		116 / 145		99 / 144		34 / 133		2 / 115		-

Figures in % as on June 30, 2013; Returns above 1-year in CAGR (Compounded Annual Growth Rate) terms; YTD* – Year to date (it represents returns between January 1, 2013 to June 30, 2013)

The fund has managed to consistently out-perform the benchmark in the last five years. It even out-performed the category average in this period. During the bear market of 2008 and 2011, the fund’s performance was near to the median of the category.

	Scheme Name		2008		2009		2010		2011		2012
ICICI Pru Discovery Fund-Reg(G)		-55.80		128.87		27.71		-23.73		46.01
CNX Midcap		-60.23		94.85		19.16		-31.00		39.16
Category Average		-55.80		83.35		19.46		-24.41		34.36
Category Rank		60 / 110		2 / 123		17 / 130		70 / 137		18 / 141

Absolute Returns; Figures in %

Risk. In terms of measures of risk such as standard deviation and beta (measured over last three years), the fund has taken lower risk compared to the category median.

	Scheme Name		Standard Deviation		Beta
ICICI Pru Discovery Fund-Reg(G)		0.85		0.68
Category Median		0.93		0.81

The ratios have been calculated as the average of three years till May 2013

Risk-adjusted Returns. In terms of measures of risk such as Treynor ratio and Sharpe ratio (measured over last three years) the fund has delivered a much superior return for risks undertaken in the portfolio vis-à-vis its category median.

	Scheme Name		Treynor		Sharpe
ICICI Pru Discovery Fund-Reg(G)		0.024		0.023
Category Median		0.007		0.013

The ratios have been calculated as the average of three years till May 2013

Process

ICICI Prudential Discovery Fund adopts a 'Bottom-up' strategy, to identify and pick its investments based on an evaluation of several parameters such as Price / Earning, Price / Book Value and Dividend Yield. The fund manager's mandate is to build a portfolio that is well diversified across sectors and constructed based on in-depth research.

The fund also buys into special situations which could have been depreciated for a short period due to some exceptional circumstance or due to market correction phase or due to lack of interest in investing in a sector, which has significantly underperformed the market.

The fund is a pure equity diversified fund as it is not restricted in terms of market-capitalisation or sector or theme. Instead the Scheme Information Document states: “The universe of stocks for this Scheme will be defined as those stocks whose prices are low relative to their fundamentals, their historic performance, their book values, their earnings and cash flow potential and current and/or future dividends.”

Portfolio

As of May 2013, the fund has 70 stocks in its portfolio against the category median of 41. Its average portfolio allocation over the last five years has been 55 stocks. The least number of stocks in its portfolio was 34 which it had touched on two occasions, November 2008 and August 2009. The highest count was during May of 2011 at 77. The fund used to invest in around 40 stocks till its AUM was around Rs 700 crore. As the fund reached around Rs 1,000 crore of AUM the number of stocks in its portfolio went up to 50-60 stock on an average. There are 30 stocks in the portfolio with individual weight of less than 1% and their cumulative weight is only 13% of the portfolio.

In the last five years (between June 2008- May 2013), the fund has had an average exposure of 37 per cent to large-cap companies. During this period average exposure to mid-cap companies was at 45 per cent and approximately 8 per cent to small caps. Its average exposure to cash and cash equivalents during this period has been around eight per cent.

The fund’s portfolio in the last six months shows a heavy tilt towards cyclical companies. The fund seems to be low on defensive stocks. It has investments across the market cap. As the valuations in FMCG have consistently been on the higher side, the companies from this part of the stock market do not feature in the portfolio. Meanwhile, within the pharmaceutical space the fund has had an average allocation of 6 per cent till June 2013. For defensive position the fund has invested in a combination of CBLO, term deposit and pharmaceutical companies, in total they account for 10-15 per cent of the portfolio in the first six months of 2013.

People

Currently the fund is being managed by Mrinal Singh who took charge in February 2011. He is assisted by Atul Patel, who will be responsible for the fund’s ADR, GDR and other investments in foreign securities.

Singh has been with ICICI Prudential AMC since June 2008. In addition to ICICI Pru Discovery, he also looks after ICICI Pru Mid-cap, ICICI Pru Technology, three Monthly Income Plans, and several Hybrid funds.

Between September 2005 and January 2011 the fund was managed by Sankaran Naren. And the fund will still have the advantage of his guidance, since Naren is the chief investment officer of the ICICI Prudential AMC.

View

The fund’s performance will depend completely on the skill-set of the fund manager. It has been over a year since Mrinal Singh has been managing the fund and he has proved successful even with a rising AUM. The fund is not meant for the faint hearted as it will go through high volatility. Also investors should invest in this fund with a horizon of more than three years.

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