ICICI Prudential US Bluechip Equity has given a return of 43 per cent in the past one year. Chirag Madia speaks with fund manager Atul Patel to know more about it
What is the case for US Bluechip Equity Fund?
I would say that US market is of a completely different asset class as it has low correlation with Indian equity and that is the first reason Indian investors should be investing in this fund. Second, when I say diversification by business access, it is because Indians get exposure to some of the finest businesses in the world with good return on capital employed (RoCE) and very deep value creation; which simply does not exist in India. We don't have Facebook, Yahoo, Apple or Microsoft available on Indian stock exchanges. Third, I believe that every country has its own strengths and weaknesses from the macro economic perspective and so does India. So investors need not put all their eggs in one basket. When we look at the US, it is almost one-third of the world's market cap, is a leader in innovation and its stock market has more depth compared to India. Apart from that, one has to diversify given the currency movement. In the last few decades we have seen the rupee depreciate greatly against the dollar. These points itself make a solid case for investment in US markets.
Rupee depreciation has been a bonanza for Indian investors in the fund. What is your outlook for the rupee against dollar?
Peeping into future is always full of risks, but we believe rupee has depreciated enough and sooner than later it should find the lever at Rs 60.
But if someone asks me about the long term rupee movement (i.e. 3-5 years), I would say it will be a function of several factors which are not in control of India. Problem is, as a country, we don't have control over oil prices or foreign flows or even interest rate situation. So in the long run we will continue to face pressure on currency because of its structural issues. One has to understand that whenever capital moves from emerging markets (EMs) to developed markets, countries having high CAD are more vulnerable against countries with current account surplus. However, at this point of time, rupee deprecation from economic perspective is neither good nor bad, it is just a phenomena and every country responds to it in a certain manner. But extreme volatility in the rupee can be scary. In the long run rupee will be more in the direction of Rs 65 against the dollar.
What is your outlook on the US markets in the near term?
Looking at the broad numbers which are coming in, it looks like that the positive mood will continue in US markets. The rally might not be as sharp as we have seen in the past one year, but it will continue to remain better in near term. There are four parameters to gauge the strength of US markets: housing numbers, unemployment numbers, broad inflation trends and economic growth trends; they all are doing extraordinarily well. Even growth in corporate sector and consumer sector has shown drastic improvement. Corporate sector is not leveraged and now they are cash surplus and consumer has significantly deleveraged. Economic growth has been improving with every passing time, so the bad times for US are gone.
How sustainable is the performance of the US market amidst the global turmoil?
First and foremost we believe the US market is spread-out across various businesses and asset classes. Recent discovery of shale gas will have significant implications on how US grows, how the capital gets allocated within the country and how the saving gets generated. US is also one of the most productive economies in the world and that doesn't change in the matter of 3-5 years. However, like every other economy it had its weaknesses which were brought out but have now been resolved. In my view this recovery is not lame and this is not the kind of recovery that might get killed in the next few months
What drives your stock selection or exit from a position in the fund?
For this fund we have tied up with Morningstar research. They have their own list of 'wide moat stocks', which basically means companies that have a sustainable competitive advantage over their peers. The list includes 100-150 'wide moat stocks' out of which an index of 20 stocks is created that is called 'Morningstar Wide Moat Index' and we invest in stocks from that particular index. This index is created by a simple criteria of price by fair value, where price is the current price and fair value is what they think is the fair value of a stock. So we own most of the stocks from the index. The only stocks we don't touch are those which have market capitalisation of less then $4 billion even though they are there in the 'Morningstar Wide Moat Index'. The index is rebalanced every quarter and we similarly tweak our portfolio accordingly. Besides the stocks that form part of the index, we look at global leaders listed on NYSE and NASDAQ, having market cap greater than $4 billion, and are very popular worldwide.
What are the internal rules for the portfolio - quality, scale, sector allocation etc?
The index in which we invest covers 16-18 industries and that gives us enough diversification. However, consumer stocks don't come into the index because generally they are costlier and we try and take few of them from outside the index. So if you look at the portfolio construction, 75-80 per cent of portfolio is replicated by 'Morningstar Wide Moat Index' and balance 20-25 per cent is actively managed. Apart from that, we don't take any active calls on currency movements. So whenever we get inflows we transfer the money and whenever we get outflows we redeem it. The idea here is to give all the benefits directly to the investors.
What type of investor should refrain from investing in such funds?
Those just starting off or even those who are building their portfolio might refrain from investing in international products. Because international diversification may not appeal to them or they find it little complex. Those in their early stage of investment cycle should go with pure diversified equity funds till they reach the stage where wealth preservation becomes more important than wealth accumulation. But from the point of view of high networth individual this product becomes extremely crucial.