Fund Review- ICICI Prudential Focused Bluechip Equity Retail

Category: Large CapManager’s Benchmark: S&P CNX NiftyInception Date: May 23, 2008Fund Manager: Prashant KothariTotal Net Assets: Rs 3532.2 crore as on Dec 31, 2011NAV: Rs 14.52 as on Dec 31, 2011

Fund House Pitch

“Diversification is needed to reduce risk, but too much

diversification can result in diminishing returns. Therefore, it

makes sense to strike a balance between minimum risk and

maximum returns, which is what a focused fund does. By investing

in the largest companies because of an outlook that they will be

the most stable through any situation, it strives to grow your

wealth in the long run.”

“ICICI Prudential Focused Bluechip Equity Fund, an open-ended equity scheme, aims to maximize long-term total returns, from a focused and optimally diversified portfolio that is invested in equity and equity related securities of about 20 companies belonging to the large cap domain. This strategy has the potential to generate positive returns from being overweight on certain high conviction stock picks.”

Investment Philosophy

This fund invests in about 20 equity and equity related securities,

and seeks to generate long term capital appreciation. The

portfolio is mandated to select stocks from among the Top 200

stocks in terms of market capitalization on the NSE. This fund

adopts a bottom-up approach to Stock Selection and the fund

manager has the flexibility to choose between stocks across all

themes, sectors and investment styles.

2011 Period

My Analysis

This fund was launched in May 2008. As we could recall that year

wasn’t just the year of the bear but also the year that witnessed

one of the most terrible bloodbaths for Global equities in our

recent memory. Most market players were shying away from

equities and taking refuge in cash, gold and debt instruments. But

Prashant Kothari held a different view in those times, that he

capitalized on irrational market behaviour and took bets with

some large caps whose prices have fallen down during the

downturn but had promising business potential and healthy cash

flow position. When the market began to shown signs of recovery,

his portfolio was well poised to lead the charts. Since then, there

has been no looking back.

Since 2009 not only it has beaten the benchmark in every single

calendar year but also marched ahead in the peer category. In

2011, 2010 & 2009 it outperformed S&P CNX Nifty Index by

8.236%, 9.12% & 15.43% respectively.

2011 Period

Investment Approach

Since inception of this fund, he has invested in only 36 stocks.

More often than not he takes long position with his holdings. Due

to this approach, the Portfolio turnover ratio of this fund i.e. 0.38

times is quite low compared to its peers. However if an existing

holding looks overpriced beyond a level, he doesn’t hesitate in

booking profits. Prashant follows a bottom-up and an active

approach, he looks for Industry heavy weights but doesn’t have

any sector bias as such. As quoted earlier also he looks for

companies whose business model seems promising, exhibit high

corporate governance levels and the management looks trust

worthy. He uses a combination of DCF models and relative

valuation factors such as P/BV, EV/EBITDA, P/E, and PEG to

evaluate a company’s fair value. To cite instances, in Auto space,

he favoured Bajaj over Hero Moto or Tata Motors, given Bajaj’s

cheaper valuation & better profit margins. For similar reasons his

preference for PNB & BOB over SBI amongst Public sector banks

and Infosys over TCS in the Technology space is well justified.

He also has a strong dislike for highly leveraged firms, which

explains why he has always avoided Real Estate & Infrastructure

so far. On few occasions he has also taken contrarian bets in his

securities selection. Prashant keeps almost 5-10% of assets in

Equity or Index Futures to maintain liquidity and at the same time

maintaining equity exposure for the fund.

Holdings Analysis

As mentioned in AMC’s pitch, they do not believe in too much diversification. The fund holds just 20 stocks comprising mostly blue chips. As a truly active fund, the portfolio’s sector weights remotely align with that of benchmark S&P CNX Nifty. See current sector holdings below:

As end of Dec 31, 2011

As evident from the above pie chart, currently almost 64% of assets are allocated amongst Energy, Financial, Technology & Healthcare sectors. He does not hold any exposure to Real Estate and Civil Aviation sector as those firms do not qualify his quality filters like high corporate governance level, superior management structure and low leverage. As of Dec 2011, Equity & Index futures accounted for 5.19% of the portfolio & Cash levels stood at 5.64%. Prashant’s high-risk specialized/concentrated strategy has paid off investors so far. But it has also missed a couple of Sector rallies like Metal’s bull run in 2009. BSE Metal index delivered 233.68 % in 2009. Likewise the recovery of Tata Motors since 2008 has been phenomenal, it has given 70.26% return annually over last four years period. Unfortunately the Fund Manager failed to capitalize on that true fairy tale instance. Inclusion of Idea in Communications & HUL in the FMCG category would have boosted Portfolio’s returns significantly in 2011 period as both yielded 18.33% and 30.20% respectively for the calendar year. His conviction for BHEL & ICICI Bank has not gone well for 2011 calendar as they were down by 48.61% & 40.21% respectively. However both these stocks will surely cheer up long term investors as ICICI bank is expected to post strong Q3 numbers on the back of business recovery, improvement in NIMs & low exposure to Telecom & Aviation firms whereas BHEL enjoys near monopoly position in Capital Goods/Engineering space, it has strong order book and also hold high cash levels.

A tour through Portfolio holdings throughout 2011 suggests that Fund Manager has a quality bias, he prefers value (margins) over volumes. In September, the Fund made an exit from TCS which is

IT sector’s new bell weather and has rather increased exposure to Infosys despite its subdued performance on the charts recently. In fact, as end of 2011 Infy held the biggest weight in the portfolio. It has also added another Pharma names to the holdings list by taking fresh exposure to Cadila in October month. It’s undoubtedly amongst the big boys of the Industry, has had strong top-line and bottom line growth last year, possess a well diversified product portfolio besides a few promising drugs (Generics) in the pipe line. The fund also completely sold off Oracle Financial Services and Mahindra & Mahindra in October & December month respectively.

Security wise Portfolio breakup

Company Sector

Weight (% 0f

Assets) 1 Year

Return

Infosys Ltd Technology 9.44 -19.61

RIL Energy 8.37 -34.55

Wipro Technology 6.18 -18.84

Bajaj Auto Automobile 5.96 3.27

Cipla Healthcare 5.95 -13.49

Bharti Airtel Communication 5.08 -4.26

ITC Ltd FMCG 4.98 15.26

Bank of Baroda Financial 4.85 -25.8

Hindustan Zinc Metals 4.6 -12.54

Axis Bank Financial 4.34 -40.15

ICICI Bank Financial 4.12 -40.21

Power Grid Corp Energy 3.85 1.83

Tata Power Energy 3.74 -36.11

Cairn India Energy 3.38 -5.56

ONGC Energy 3.18 -20.32

Grasim Industries Diversified 3.18 6.23

Cadila Healthcare 3.06 -8.91

PNB Financial 2.05 -36.1

HDFC Bank Financial 1.44 -9.04

BHEL Engineering 1.42 -48.61 As end of Dec 31, 2011

Performance Analysis

As its name suggests, the scheme focuses on some of the finest Industry heavy weights and thus has reaped the benefits of stupendous recovery seen in the large-cap space after the market meltdown in 2008. Having acquired most of its equity investments at discounted rates in the second half of 2008, ICICI Prudential Focused Bluechip Equity delivered 91% returns in 2009 as against 76% returns by its benchmark S&P CNX Nifty. It has consistently beaten the benchmark in the last 3 years. Though being relatively new, it has eclipsed the performance of some of Industry’s best performing old names like HDFC Top 200, Franklin India Bluechip, DSP BR Top 100 etc. No wonder why it was awarded with CRISIL number one ranking in Open End Large cap Equity schemes category. It also commands 5 star ranking from both Morningstar & Value Research. It’s AUM has grown from Rs 1658.17 crore in the beginning of 2011 to a massive size of Rs 3532.16 crore as end of 2011, thereby clocking a growth of 113% in just one year. All these factors reflect an impressive track record for the fund.

Period Fund Nifty Sensex BSE 100 MSCI India

1 M -3.01 -4.3 -4.15 -4.83 -4.38

6 M -12.95 -18.12 -17.99 -19.13 -18.9

1 Y -16.41 -24.62 -24.64 -25.73 -26.33

2 Y (Ann) 3.06 -5.71 -5.93 -7.32 -8.06

3 Y (Ann) 26.63 16.04 17.01 16.7 17.42

Period- Jan 1, 2009 till Dec 31, 2011

Top 5 Performing Constituents

Company Sector Contribution

ITC Ltd FMCG 0.76

Grasim Industries Diversified 0.20

Bajaj Auto Automobile 0.19

Power Grid Corp Energy 0.07

HDFC Bank Financial -0.13

Bottom 5 Performing Constituents

Company Sector Contribution

RIL Energy -2.89

Infosys Ltd Technology -1.85

Axis Bank Financial -1.74

ICICI Bank Financial -1.66

Tata Power Energy -1.35 As end of Dec 31, 2011

Relative Performance

Date Fund Benchmark Out/Under

Performance

Jan-11 -8.52 -10.25 1.73

Feb-11 -2.96 -3.14 0.18

Mar-11 9.73 9.38 0.34

Apr-11 -0.65 -1.44 0.79

May-11 -2.86 -3.29 0.44

Jun-11 2.14 1.57 0.57

Jul-11 -0.84 -2.93 2.09

Aug-11 -8.52 -8.77 0.25

Sep-11 -0.07 -1.15 1.09

Oct-11 6.55 7.76 -1.21

Nov-11 -7.08 -9.28 2.21

Dec-11 -3.01 -4.30 1.29

1 Year Period -16.41 -24.62 8.21 In 2011, except for October month, the fund has always given

positive relative return over its benchmark. Those were extremely

volatile period for the broader markets. Even if we go beyond last

year, the fund has beaten both benchmark and category average

across various market cycles in last three years.

Since inception till Dec 31, 2011. Base taken as 10.

Other Quantitative Indicators

Average P/E: 17.79

Average P/BV: 3.38

Average Dividend Yield: 1.69

Average Portfolio Turnover Ratio: 0.38 times

Std Dev (Annualised): 22.82%

Sharpe Ratio: 0.78

Portfolio Beta: 0.85

R Squared: 0.97

Annual Management Fee: 1.25%

Total Expense ratio: 2.10% Portfolio turnover has been computed as the ratio of the lower

value of average purchase and average sales, to the average

net assets in the past one year.

Risk-free rate based on the last 91-day T-Bill cut-off of

8.4782%.

Bottom-line for investors

The fund’s opportunistic investment in fundamentally sound

companies from attractive sectors has paid off investors really

well. Its investment rationale is tilted towards large cap-growth

flavour and committed to long term capital appreciation from

investments in handpicked blue chip stocks across various sectors.

The fund has outperformed the broader indices by fairly good

margins historically. Do consider this ‘aggressive large cap open-

ended fund’ while evaluating various mutual funds for your Equity

fund portfolio and SIP your way to achieve long term goals.

Always remember that the fund has highly concentrated portfolio,

so new investors with high-risk quotient can consider investing in

the scheme with a long term investment horizon.

Disclaimer- Due diligence has been exercised in checking the authenticity of all figures mentioned in this report. But that does not

guarantee its accuracy or completeness. The recipient of this material should rely on his/her own judgment and take prudent decision before acting on the above piece of information.

06-Feb-2012, © Saurabh 2011 (Saurabh Kumar|kaashyap.saurabh@gmail.com|+91-8374109195)