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The Prudent Player

Prudential ICICI has made all the right moves to become the largest private sector fund house. It is best seen as an innovative AMC with high quality debt funds and a mix of top performers and middle-of-the-roaders on the equity side

After UTI Mutual Fund, Prudential ICICI is the largest asset management company in India. The amazing part is that it has achieved this size in just five years and that too, without any acquisitions.

ICICI Mutual Fund started as a joint venture between ICICI and JP Morgan, an US-based investment bank. This venture didn't really get anywhere. Till 1998, it ran two closed-end funds, ICICI Premier and ICICI Power. Both were middling performers in a market that was in a flux.

The year 1997 was a turning point for the fund house when ICICI replaced JP Morgan with British insurance and pension major Prudential. Prudential had expertise in distribution and investment management and more than that, its focus on retail services fitted perfectly with the new ICICI, which was building a retail focus. In the following years, the AMC set the standard for what aggressive growth in the mutual fund industry was all about and reached the number two slot in just five years. With the downsizing of UTI, Prudential ICICI is now just a fifth smaller than UTI Mutual Fund. But this comparison with UTI hides more than it reveals since UTI is a retail-led AMC with large equity assets and Prudential ICICI—like all 'modern' Indian AMCs—is heavy on institutional investors and debt assets. It is also a leading product innovator in the industry with a variety of funds, which are aggressively sold, with the help of ICICI's enormous brand presence.

Prudential ICICI's fixed income funds are characterised by low risk, blended with a cautious emphasis on performance. On returns alone, Prudential ICICI Income Plan and Prudential ICICI Gilt Investment have been average performers in their categories. The income fund does not take too much credit risk as below AAA rated bonds are capped at 15 per cent of assets, nor does it stretch out too far on the average maturity spectrum.

In equity funds, Prudential ICICI Technology and Prudential ICICI Tax Plan have been in the top quartile for the trailing three years, while Prudential ICICI Power, Prudential ICICI Growth and Prudential ICICI Balanced are in the second quartile.

Driven by heavy technology exposure, equity funds outpaced their peers and benchmarks during the 1999-2000 rally. But in the crash that followed, the erosion in their returns was also much more than the benchmark and the category averages. In 2001, even though the markets were bleeding again, these funds largely managed to contain losses.

But year 2002 was turnaround time. The technology fund swore off momentum stocks in 2001 and has stayed with large-caps since then. This fund was a winner in 2002. Prudential ICICI Growth too has pruned tech holdings, diversified its portfolio across sectors and maintained a strong large-cap bias, closely replicating its benchmark, the Nifty. Prudential ICICI Power, which originally had a core sector theme has now come to resemble a diversified fund. It also shows an inclination towards mid-caps and has delivered superior returns than Prudential ICICI Growth. The induction of a new fund manager in Prudential ICICI Growth—Chandresh Nigam, who formerly managed Zurich India Equity—has seen a marked change in the investment style of both Growth and Power. While Prudential ICICI Growth will not own more than 20-25 stocks forming the best companies from various sectors, Prudential ICICI Power will have a much larger universe of stocks to play with.

Prudential ICICI Tax Plan has aggressively courted mid-cap stocks and has climbed up the performance ladder so far. In contrast, the AMC is quite conservative in managing interest rate risk in the Balanced Fund and the equity exposure in the Monthly Income Plan.

Prudential ICICI has worked hard to offer a full bouquet of funds to investors. With the basic fund types in place quickly, Prudential ICICI also has a number of exotic offerings. It has recently launched Prudential ICICI Deposit Plus NRI Series, as an additional plan under the existing Fixed Maturity Plan and SPIcE, an Exchange Traded Fund tracking BSE Sensex.

Prudential ICICI is best seen as a large yet innovative AMC whose debt funds are characterised by high quality, conservative portfolios and whose equity funds are a mix of some top performers and some middle-of-the-roaders. While it's easy to say that Prudential ICICI's equity funds are not top-performers, one must remember that for all practical purposes this is quite a young fund house. Almost all its equity funds were launched at or near the crest of a big bull-run and thus ended up having a bad time initially. It is only now that these funds are beginning to build up a normal, multi-cycle track-record and to be fair, they look much better than they once did.

Strategy Note
Shailendra Bhandari
MD, Prudential ICICI

The key objective for all our schemes remains portfolio diversity, portfolio liquidity and a bottom-up approach to investment with risk controls so that there is moderation at all times. Within that, for individual funds, the philosophy is tuned depending on the specific nature of the scheme, its objectives and investor requirement.

Investment Philosophy for Equity Funds
Growth Plan: This plan aims at being the core equity mutual fund holding of an investor. It invests around 85 per cent in large-cap stocks of companies that have a sustainable business advantage over a three-five year scenario. There may be some concentration in stocks to allow for active fund management, but there will be good sectoral diversity related to that seen in the benchmark CNX Nifty.

Power Plan: This highly diversified plan aims to provide superior risk-adjusted returns by taking relatively aggressive sectoral and stock calls without divorcing the risk control principles. It caters to investors looking for growth from a core portfolio as well as participating in some value play through mid-cap stocks as well as higher-beta, large-cap stocks.

Dynamic Plan: This plan can invest in both equities as well as debt, and targets investors seeking absolute returns as well as some degree of capital protection. As an asset class, debt is chosen as a defensive play. The equity calls can be moderately aggressive in terms of stock and sectoral concentration.

Optimistic on the Indian Fund Industry
The Indian market offers an extremely exciting opportunity. The tremendous growth that we have seen over the last five years has been achieved despite low penetration beyond the larger cities. As a share of household financial assets, mutual funds constitute less than 1 per cent. The Indian story is particularly exciting when one realises that we have a very young population who have yet to begin their financial planning. Over the next five to ten years, as the population ages, the need for long-term products that generate returns that significantly beat inflation will be high. We expect that this need will be best met by mutual funds. Add to this the pension reforms, which are already underway, and the outlook become more compelling. Naturally, as one of the market leaders, Prudential ICICI will be at the forefront of this entire process.