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Equity Challenged

ICICI Pru Infra made the right moves in 2008, but missed the 2009 market rally

The highest alpha generator in the category, its returns have impressed. Though launched in August 2005, it emerged as a strong contender only since 2007 when its back-to-back annual performance put it ahead of its peers.

It beat the category average in 2006 but was the best performer in 2007 and 2008. It topped the category in 2007 (92.92%) and fell the least in 2008 (-51.64%). In fact, it was around 3 per cent lower than the average fall in the diversified equity fund category. In the first quarter of 2009, it actually delivered 1.27 per cent (category average: -5.32%). It also has the highest 3-year annualised return (20.74%) among infrastructure funds (as on May 31, 2009).

According to fund manager Sankaren Naren, the secret lies in “a combination of successful sector rotation strategies combined with optimal derivative exposure and exposure to Nifty.”

In 2008, the fund made the right moves. It hiked up its exposure to large caps to average at around 77 per cent, while that of its peers averaged at 54.61 per cent. But its ability to contain the downside was helped in a large way by the heavy debt exposure (which peaked at 36%) and the liberal use of derivatives. At times, purely as a hedge, or to benefit from arbitrage opportunities by taking simultaneous positions in the equity and derivatives segment.

But where the fund got a miss was in the recent rally (March 9 - May 31, 2009) with a return of just 62.72 per cent, way below the category average of 81.74 per cent. Not surprising when you see that its equity exposure dropped from 89 per cent in March 2009 (including derivatives) to 57 per cent (May 2009).

“In view of the rally in the market that pushed most infrastructure stocks above fair value, we cut our equity exposure,” says Naren. “Given that the equity exposure is lower than our ideal, we are looking at suitable entry opportunities where there is long term growth visibility to justify the valuations.”

This is typical of the fund manager's style and investment philosophy which is valuation driven. He actively changes the portfolio's complexion with no qualms about going against the herd. “We avoid sectors where valuations are euphoric and have run ahead of fundamentals like real estate. We believe that this is a multi sector theme fund and we have changed the sector composition of the fund in tune with the market valuations,” says Naren.

In May 2007, the fund lowered the exposure to Engineering to 5.16 per cent from 10.91 per cent in the previous month. It averaged at around 4.32 per cent for the rest of 2007 while its peers allocated around 15.74 per cent to the sector during this period. Towards the end of 2007, allocation to Energy touched 29 per cent, definitely higher than the category average and the fund manager re-entered stocks like Tata Power and NTPC from which he had exited from earlier. His allocation to Metals in the first half of the year was higher than the category average and it dipped towards the end of the year when a number of other fund managers began to increase exposure to the sector.

Similarly, the fund increased exposure to Financial Services between September 2008 (9.3%) and December 2008 (23.26%). Between April 2009 and May 2009, it has dropped from 17 per cent to 10.70 per cent. During these two months, allocation to Energy has been upped from 15 per cent to 20.65 per cent.

This fund includes every sector barring FMCG, Media, Infotech and Pharma. Though the portfolio looked a little bloated last year, this year it has averaged at around 40 stocks. The fund manager rarely bets more than 25 per cent on a single sector and more than 8 per cent on a single stock, barring a few large cap names.