Prudential-ICICI Power is charging ahead with great vigour. Obviously the fund is on a high thanks to the handsome returns it has fetched in an otherwise sluggish markets. However, don't get carried away by this core-sector dedicated fund's—which went open-end one-and-a-half-years back—recent performance, as it's yet to be proved whether it can maintain this good track record over the long-term.
What has helped Pru-ICICI Power register an 5 per cent growth against the category's 5 per cent loss in the trailing one-year is its theme. The fund raked in sharp gains in its NAV from its exposure to mid-cap stocks like Eicher Motors, and Crompton Greaves. It also owes its success to some of its tech picks. Incidentally, IT sector usually accounts for maximum exposure in this fund's portfolio.
When the fund started its innings as an open-end fund in September 2001, it maintained a high cash exposure. Till June 2002, on an average, 38 per cent of its small asset base was parked in cash. Thus, during the bull run post-9/11 and in February 2002, this fund underperformed its benchmark - the Nifty. After June 2002, however, the cash component has averaged around 10 per cent. The fund manager here tends to actively churn the portfolio. Though Prudential-ICICI Power's portfolio turnover is not among the highest in the category, only 2-3 stocks have consistently figured in its portfolio disclosure of past 16 months.
So far this hasn't really affected the performance of the fund. But then by pressing the sell button for some stocks, Prudential-ICICI Power has at times missed the opportunity to make more profits. For example, it sold Grasim Industries after its market price gained 7 per cent and I-flex Solutions after it gained 29 per cent. Since the time the fund exited these stocks, they have gained 17 per cent and 20 per cent, respectively.
Going back to its closed-end tenure, spanning over six years, Prudential-ICICI Power was largely a laggard both in rising and falling markets during 1995-97. Re-balancing its portfolio in favour of technology during the bull run of 1999 helped the fund make it to the top among 11 other closed-end equity funds. But the subsequent market crash saw Prudential-ICICI Power slip to the bottom in 2000. In 2001, when the markets were facing tough times, the fund's loss was less severe than half of its open-end peers.
As of now, besides banking, auto and technology (its top sector positions), engineering sector accounts for maximum weightage among diversified funds. With its theme sectors performing well, Prudential-ICICI Power is delivering decent returns. But then that may not be the case always. Hence, investors should have limited exposure to this theme sector fund. Also, keep in mind that this fund has got the highest entry load among its peers.