How has ICICI Pru's balanced advantage fund bounced back?

Disciplined. Data-driven. Unfazed by the noise. That’s Rajat Chandak for you. As Senior Fund Manager at ICICI Prudential Mutual Fund, he oversees approximately Rs 84,400 crore across three funds, including the four-star-rated ICICI Prudential Balanced Advantage Fund and ICICI Prudential Flexicap Fund.

But his investing playbook isn’t built on market momentum. It’s rooted in ground-up research, valuation discipline and a willingness to lean into overlooked themes, from subdued consumption stocks to public sector power plays. In this interview, Chandak unpacks the ground-level research behind his stock picks, the strategy shifts that powered the balanced advantage fund’s turnaround and why playing it safe in a bull market is very much part of the plan. Below is the edited transcript of the conversation.

What is your view on the current Indian market landscape? With valuations running high across segments, where are you spotting value today?

Markets have performed reasonably well and have recently reached new highs. It is not easy to find pockets of value at this point. However, I see relative value in the consumption basket. If you look at some of the large retailers, for example, their growth has been slightly challenging, which has impacted their valuations. One could argue that absolute valuations may still not be very cheap, but relatively speaking, compared to other segments that have performed well, these look more attractive.

Additionally, in the medium term, the tax cuts announced in the recent budget, combined with the positive monsoon outlook, should help revive demand. Demand in the consumption basket has been relatively slow for a few quarters now. As the demand cycle picks up over the next couple of quarters, I think consumption will perform reasonably well. That's one pocket that looks relatively attractive, considering its position in the business cycle.

Second, banks, especially some large ones, still look reasonably valued. Some have performed well, but there is still scope for others to catch up in terms of valuations. Power, particularly in the public sector, is another pocket which is reasonably valued at this point. In many other sectors, it is more bottom-up. 

You also place high importance on management quality and stakeholder fairness. How do you evaluate these softer aspects, especially in mid- and small-cap companies where disclosures are patchy?

This is where bottom-up and ground research come into play. We continue to engage with stakeholders across companies, including mid-level management, former employees, dealers, distributors and suppliers – the entire ecosystem. It is not just about listening to what the top management or CXOs are saying.

We conduct groundwork to gather feedback on the processes and systems these companies follow, as well as their transparency and fairness in dealing with stakeholders. Our entire team at ICICI Prudential AMC focuses on this to help form our views.

In the long run, companies that treat their stakeholders fairly, including customers and partners, tend to perform well. That is one of the core pillars of my investment approach. This is easier to do in B2C companies, where you can talk to a lot more people on the ground, compared to B2B companies, where access is limited. However, we still try to gather feedback on how the company is being run, what the promoter or management's thought process is and so on.

This process is more qualitative; there are no hard numbers to back it up. It is the feedback we collate over time that forms our impression and this is a continuous process. Once you form a view, you continue to check and see if things are improving or deteriorating. It can move in either direction.

The ICICI Balanced Advantage Fund's lower equity allocation during the 2023–24 rally affected returns, but it's now back in the top quartile in 2025. What strategic recalibrations have worked in its favour?

We made two or three changes this year. First, we were underweight in IT but added exposure once valuations corrected, particularly due to global uncertainty, like the developments in the US. That allowed us to add some names at much more attractive valuations.

Second, we added exposure to select large companies in the oil and gas space because their valuations became very attractive.

Additionally, some of our existing holdings were beneficial. For example, auto OEMs that we have held for a long time performed well this year. In financial services, life insurance and certain capital market stocks that we added when the opportunity arose also performed well.

We were meaningfully underweight in FMCG as a sector, but a couple of our bottom-up picks outperformed the broader sector. Large banks also performed well, contributing to the fund's success. So, it was a mix of two or three changes and strong performance from existing holdings.

Since the ICICI Pru Balanced Advantage Fund dynamically shifts between equity and debt, what kind of investor profile is it best suited for? Would it be suitable for someone seeking a 50:50 equity-debt allocation?

The equity allocation range in the fund is between 30 and 80 per cent. Over time, it tends to be around 53-55 per cent net equity. This product is largely about risk-adjusted returns. Even with about 50 per cent equity, the fund has historically delivered 80-100 per cent of Nifty returns over long periods. It also provides peace of mind during drawdowns. If the market falls 10 per cent, the fund might fall only 3-4 per cent, owing to cautious allocation. That is important for investors. Therefore, for someone seeking balanced exposure and stability, this can be a suitable option.

Does a prolonged upward market make the dynamic allocation model look cautious by default? Have you considered adjusting the model to respond faster in such cycles?

The one thing that remains constant in any market is volatility. Even in upward-trending markets, there are phases when the market drops by 5-10 per cent and that gives us opportunities to add equity at better valuations.

Our model is valuation-based. If markets rise faster than earnings or book value, valuations become expensive and the model suggests reducing equity exposure. So, yes, it might appear cautious during a bull run, but it is based on valuations.

We continually evaluate ways to improve the model. Internally, we regularly brainstorm and back-test new factors. However, only one or two out of every 10 ideas make it through. We have made model changes two or three times over the past few years, but only after deep deliberation and backtesting.

Could you share some of the model changes that have been made in recent years?

One was related to changes in taxation across asset classes. When tax differentials shifted, it made one asset class more attractive and we adjusted our approach accordingly.

Another was the addition of the earnings yield gap. Our model previously relied heavily on price-to-book (P/B) valuations and there was a concern that in phases of strong earnings growth, the model might become too cautious too early. Therefore, we introduced the earnings yield gap to account for this.

Many investors fear missing out during bull phases if they are in dynamic asset allocation funds. How would you address these concerns in the context of the balanced advantage fund (BAF) strategy?

We believe investors should focus on risk-adjusted returns. Since this is a conservative hybrid fund, with average equity exposure around 50-55 per cent, there will be times when returns lag behind during bull markets.

However, over a 7-10 year horizon, the fund has historically delivered 75-100 per cent of market returns. So yes, returns might slightly trail the market, but they come with lower risk. It is suitable for investors with a moderate risk profile.

The ICICI Pru Flexicap Fund has consistently outperformed its peers since its launch. Could you walk us through the core strategies or calls that have driven this performance?

The flexi-cap category is particularly interesting because it allows us to invest across market capitalisations. Unlike BAF, which involves daily adjustments, the flexi-cap fund follows a buy-and-hold approach. The focus is on bottom-up research and we have stayed fully invested.

Many of the names in the portfolio have been held for a long time. I focus more on consumption-oriented B2C businesses where ground-level research is easier. That gives me the confidence to wage bigger bets.

This strategy has been effective over the past few years, although the consumption slowdown in the last three to four quarters has been a drag. However, as the economy improves, I expect consumption to rebound.

The flexi-cap fund's exposure to small-cap companies is relatively high. With recent froth in that space, how do you define the risk-reward now? Are you planning any recalibrations?

The high exposure to small caps has helped over the last two to three years. We often find interesting opportunities in specific categories that can only be played through small caps. It is not a top-down call to be overweight in small caps; it is more bottom-up. We keep a close eye on the benchmark allocation, which is around 25-27 per cent and try not to deviate too much from it.

There are two key factors to consider when investing in small caps. First, you need a longer time horizon – three to five years – to let the investment thesis play out. Second, liquidity is low in small caps. You cannot quickly trade in and out of positions. Thus, most of our small-cap calls are made with a medium- to long-term perspective and driven by strong bottom-up conviction.

Also read: High-quality stocks are back in favour: Vinay Paharia