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Discovering Value

ICICI Prudential Discovery will not disappoint in the long run, even though its value-driven strategy may face setbacks…

Don’t expect this one to be on a roll all the time. Its performance during the heady days of 2007 disappointed and this year it put up an average show.

But investors need not fret. Its value-driven strategy is bound to meet with periodic setbacks. In the long run, no one is left disappointed. Over the three-year period ended October 30, 2011, it is the third best performer in its category of 66 funds.

The fund showed excellent downside protection capabilities in 2008. And to achieve this with an equity exposure averaging 95 per cent is testimony to the fund manager’s skill. The following two years more than made up for its earlier lackluster performance.

The fund scouts for undervalued stocks that are available at attractive valuations in relation to their earnings (PE) or book value (BV) or current/future dividend. Hence it’s not surprising to relatively ‘unpopular’ stocks. Currently the fund holds some such as Godawari Power & Ispat, India Nippon Electricals, M M Forgings, Balkrishan Industries, Satluj Jal Vidyut Nigam and Mindtree. There are currently 28 stocks in this portfolio (16% allocation) in which less than 10 open-end equity funds have invested in.

Although the fund largely maintains a tilt towards mid and small caps, Naren is not wary of large caps, if he gets a value proposition. That’s why the fund found itself in the multi-cap category in 2005 and 2006. Recently too the large-cap exposure has been upped. “There are too many cheap large caps available after the market fell in July-August. When value is so easily available in large caps, we consider buying," says Naren, CIO Equity.

The surging asset size is also to blame. From Rs 180.40 crore (March 2009), the fund has grown to Rs 1,738.72 crore (September 2011). “To tackle the inflows what we do is buy large caps temporarily and whenever we get the mid caps in right quantity, we invest it in them slowly. We have followed this model and found it very comfortable in managing inflows," says Naren.The fund is well diversified across sectors with none accounting for more than 13 per cent of the fund’s portfolio. The number of stocks has also soared to 71 (1-year average) from 37 (March 2009).
A value-driven strategy requires persistence on part of the fund manager and investors. The fund may test the patience of the investors but those who hang on will be rewarded.