Living Dangerously | Value Research ICICI Prudential Long Term Fund's assets surged from Rs 7.7 crore in March to over Rs 1,561 crore in April. Despite this volatility in its assets, the fund has delivered good returns

Living Dangerously

ICICI Prudential Long Term Fund's assets surged from Rs 7.7 crore in March to over Rs 1,561 crore in April. Despite this volatility in its assets, the fund has delivered good returns

Two things come to mind when we look at the ICICI Prudential Long Term Fund. Great performance. Volatile assets.

The fund has been a top quartile performer since 2004. As on May 25, 2007, its returns beat the category average on every front (year-to-date, 1-week, 1-month, 3-month, 1-year, 2-year, 3-year and 5-year). This is all the more commendable given its highly volatile assets which have ranged from Rs 0.09 crore to Rs 1,565.61 crore. If this had been a gradual rise or decline over its five-year history, we would not have sat up and taken notice. What is unnerving is that the change in assets has always been sudden and sharp.

What's even more interesting is how volatile the assets have been since the start of 2007. In January, the fund had Rs 32.64 crore that dropped to a little more than Rs 8 crore in February to further drop in March (Rs 7.7 crore) and then shot up to Rs 1,565.61 crore in April.

Added to volatility of assets is the challenge of maintaining the 20:25 rule when they slip to as low as Rs 0.09 crore and Rs 8.06 crore. According to SEBI regulations, the fund must have at least 20 investors and no single investor must own more than 25 per cent of the assets of a fund. To illustrate, on the asset size of Rs 7.7 crore, a new investor couldn't have invested more than Rs 2.6 crore or else he would have breached the 25 per cent limit. Obviously, this 25 per cent limit would keep increasing with the total amount of assets. Our estimate suggests that the fund would have needed 19 new investors, each investing just enough to hit the 25 per cent limit of the increased asset size, for the asset size to have crossed Rs 1,500 crore mark. Well, the fund must have become quite popular to achieve that within a month.

This medium-term debt fund invests in debt and money market instruments. Its mandate allows it to invest the entire portfolio in debt but a maximum of 10 per cent in cash. Given that mandate, it would be extremely difficult for the fund manager to face the sudden (and huge) redemptions that take place. But a look at the portfolios shows that this mandate has often being violated. As on April 30, 2007, 31.87 per cent was allocated to cash and bank deposits and 68.1 per cent to debt. But the fund house officials explain that the offer document allows the fund manager to take defensive positions by changing the asset allocation profile. Being actively-managed, the fund may find it important to be in cash or near-cash assets.

In the latest portfolio, 29.21 per cent was channelised into bank fixed deposits - UTI Bank (22.36 per cent), SBJ (4.79 per cent), ICICI Bank (1.92 per cent) and State Bank of Hyderabad (0.14 per cent). This is a cause of concern thanks to the SEBI regulation stating that mutual funds' exposure to short-term bank deposits be limited to only 15 per cent (See page 26). But since “short-term” is defined as not exceeding 91 days, this should not be an issue with the average maturity of its holdings at 0.23 years. Despite the volatile assets, the performance is good and the portfolio seems to be of high quality.

So what's one everyone's mind? Why the sudden spurt in inflows over the last month?

A drastic one-month drop in assets……
2004 Aug 31–Sep 30 Rs 223.81cr–Rs 0.09cr
2006 Jul 31–Aug 31 Rs 107.05cr–Rs 38.30cr
2007 Jan 31–Feb 28 Rs 32.64cr–Rs 8.06cr
A dramatic one-month spurt in assets……
2005 May 31–Jun 30 Rs 2.61cr–Rs 299.91cr
2007 Mar 31–Apr 30 Rs 7.70cr–Rs 1,565.61cr

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