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ICICI Prudential Mutual Fund: Volatility- Theme for the year!
April 11, 2011

This is a brief outline of the conference call held on 11 March 2011 with Mr. Sankaran Naren, Chief Investment Officer Equity at ICICI Prudential Asset Management Company Ltd. The article presents an outlook from ICICI Prudential Asset Management Company Ltd. on markets, strategies and themes to play in 2011.


Author : iFAST Research Team



 ICICI Prudential Mutual Fund: Volatility- Theme for the year!

Key Highlights

  • The Debt and Dynamic (DD) is the recommended broad strategy - Since Debt being the key asset class and Volatility being the theme to play in the year 2011

  • Crude oil will direct the equity markets in the short term

  • For lump sum investment- ICICI Prudential Dynamic Plan

  • For SIP- ICICI Prudential Discovery Fund and ICICI Prudential Focused Blue Chip Equity Fund

Themes predicted for the Year 2011

Mr. Sankaran Naren, Chief Investment Officer – Equity at ICICI Prudential Asset Management Company Ltd.opinionates that markets in 2011 are expected to be volatile for the following reasons:

  • High inflation in India

  • High current account deficit numbers in December 2010

  • High FII inflows in India in the last two years owing to cheap valuations of the developed market relative to India

Mr. Naren highlighted that part of the volatility is a result of the recent unexpected crisis in Middle East countries such as the Libya and Tunisia.

By and large, the market has played out in terms of volatility, the theme foreseen for the year 2011 and persisting in future.

Factors influencing Equity Markets

According to Mr. Naren following factors may influence the Equity Market.

External Factors

  • The markets are expected to track crude oil in the short run. This means, if crude oil descends from US$115 to US$100, equity markets are expected to rally. However, if crude oil maintains its present value, there is possibility of markets to correct because Indian markets are not priced for US$115 crude. So, from an equity point of view, the day market shifts to a model where volatility is not important, but it would require crude oil to come down below US$90

  • Witnessing a situation where the world faces a big problem, as experienced in the recent past, people may want to invest in India on account of growth but a fair bit of market correction needs to take place before that

Internal Factors

  • If RBI assumes an easy monetary stance and inflation is reduced

Product Positioning: Neutral View

The fund house has a neutral view on equity because their investment process is based on three tenets:

  • Invest aggressively when you see fear and valuations are low

  • Disinvest aggressively when you see greed and valuations are high

  • In neutral times invest in SIP, STP and dynamic kind of funds    

“Obviously we are not having a situation of greed right now and while we have fear, valuations are not low and consequently, we are in the third bucket which says invest in SIP, STP and funds like the dynamic plan” , adds Mr. Naren.

The Fund House’s product positioning presently is:

  • For lump sum investment, the fund house recommends ICICI Prudential Dynamic Plan

  • For investment on an SIP basis, the fund house recommends ICICI Prudential Discovery Fund which is a value oriented mid-cap fund and ICICI Prudential Focused Bluechip Equity Fund which is a large-cap fund

According to him, in addition to equity products, it is advisable to create a debt product in the portfolio and all investors investing in mutual funds may have equal allocation to debt products as well. On the Debt side, the fund house has been recommending one year fixed maturity plan, short-term plan and schemes like regular savings schemes. 

If the investor is looking out for liquidity of funds may consider the liquid plans for investments. “Debt is also a very important asset class for every distributor” adds Mr. Naren.

So the broad recommended strategy at this point of time is the “DD” - Debt and Dynamic strategy.

Fund Focus: ICICI Prudential Dynamic Plan (an open ended equity fund)

In the present market environment, the Fund House recommends ICICI Prudential Dynamic Plan. The fund has the advantage to cash upon the market volatility. For example, when the market falls, the fund keeps on buying and as the market goes up, the fund starts to sell. Also, the fund had has good cash component last year in September, October and December 2010.
The fund house believes that this fund is suitable in the given conditions  when the market have been volatile, as the fund manager can easily move from cash to invested stage and vice versa. Therefore, the dynamic plans offer more flexibility during volatile times and investors can make money by investing in equity in spite of the volatility.

The ICICI Prudential Dynamic Plan also, has three sources of generating alpha

  • Cash

  • Small & Mid-cap allocation  

  • Underweight on the most overbought sector in the market

Apart from cash which is used as a method of generate alpha, the fund has a potential to invest in small & mid cap in the dynamic manner. Also, by being underweight on Banks, the most overbought sector in the market, which would simultaneously display volatility in returns as well as perform well along with the markets. Therefore, when volatility strikes the banking sector may move similar to ‘Technology’ in 2000 and ‘Infrastructure’ in 2007.  While the past performance is not an indicator of future performance, this fund has surprisingly managed to deliver an alpha of about 5% p.a. over the last three to five years which is an extremely high number.

Final Words

Mr. Naren concluded the call by saying that the investors should have a neutral allocation to equity.Within equity, the top product on lump sum side is the ICICI Prudential Dynamic Plan and on the SIP side, it is the ICICI Prudential Discovery Fund and ICICI Prudential Focused Blue Chip Equity Fund.

Also Investors, IFAs, Distributors and Asset Allocators should have a good allocation to debt on the short term side.

 

Disclaimer

This article is for information purpose only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products /investment products mentioned in this article or an attempt to influence the opinion or behavior of the investors /recipients. Any use of the information /any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

Disclaimer by ICICI Prudential Asset Management Co. Ltd.

The views expressed above are those of Sankaran Naren and / or of the AMC.  These views are based on the internal analysis / research of the markets and publicly available information. Actual results may significantly differ from the views expressed. These views alone are not sufficient and shouldn't be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions and estimates are as of this date and are subject to change without notice. Neither the AMC, nor any person connected with it, accepts any liability arising from any decisions taken on the basis of views expressed. The AMC does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient of this article should rely on their investigations and take their own professional advice. The recipient shall not print, copy, publish or share this document with any other person without prior consent of the AMC.
The sector(s)/stock(s) mentioned above do not constitute any recommendation of the same and the schemes of ICICI Prudential Mutual Fund may or may not have any future position in these sector(s)/stock(s). The portfolio of the scheme is subject to changes within the provisions of the scheme information document of the scheme. Please refer to the scheme information document for investment pattern, strategy and risk factors.  
This document contains certain forward-looking statements based on current expectations of ICICI Prudential Asset Management Co. Ltd. (the AMC). Actual results may vary significantly from the forward-looking statements in this document due to various risks and uncertainties. These risks and uncertainties include the effect of economic and political conditions in India, and outside India, volatility in interest rates and in Securities markets, new regulations and government policies that might impact the business of the AMC, the general state of the Indian economy and the demand for credit by commercial enterprises and consumers, and the management’s ability to implement the company’s strategy. The AMC doesn’t undertake any obligation to update these forward-looking statements. This document does not constitute an offer or recommendation to buy or sell any securities or investment in the units of any of the schemes of ICICI Prudential Mutual Fund or any of its subsidiaries or associate companies. 

ICICI Prudential Discovery Fund$ (An open-ended Equity Fund. Objective is to generate returns through a combination of dividend income and capital appreciation by investing primarily in a well-diversified portfolio of value stocks); Exit Load: @ICICI Prudential Dynamic Plan$ (An open-ended Equity Fund. Objective is to generate capital appreciation by actively investing in equity and equity related securities and for defensive consideration in debt / money market instruments); Exit Load: @; ICICI Prudential Focused Bluechip Equity Fund$ (An open-ended equity Scheme that seeks to generate long-term capital appreciation and income distribution to unit holders from a portfolio that is invested in equity and equity related securities of about 20 companies belonging to the large cap domain and the balance in debt securities and money market instruments. The Fund Manager will always select stocks for investment from among Top 200 stocks in terms of market capitalization on the National Stock Exchange of India Ltd. If the total assets under management under this Scheme goes above Rs. 1000 crores the Fund Manager reserves the right to increase the number of companies to more than 20. Investments in the Scheme may have concentration risk, as the Scheme invests in about 20 stocks. Exit Load: @; 
@ Exit Load: If the amount sought to be redeemed or switched out, is invested for a period of - (a) upto 1 year from the date of allotment- 1 % of applicable NAV; (b) more than 1 year from the date of allotment- Nil
$Investments in the Scheme may be affected by trading volumes, settlement periods, volatility, price fluctuations and risks such as liquidity, derivative, market, currency, lending & borrowing, credit & interest rate.  The above are only the names of the Schemes and do not in any manner indicate either the quality of the Schemes or their future prospects and returns. Please read Statement of Additional Information and Scheme Information Document carefully before investing.

All investments in mutual funds and securities are subject to market risks and the NAV of the Schemes may go up or down depending upon the factors and forces affecting the securities market and there can be no assurance that the fund's objectives will be achieved.


Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website. Risk Factors: Mutual funds, like securities investments, are subject to market risks and there is no guarantee against loss in the Scheme or that the Scheme’s objectives will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on various factors and forces affecting capital markets. Past performance of the Sponsor/the AMC/the Mutual Fund does not indicate the future performance of the Scheme. The name of the Scheme does not in any manner indicate the quality of the Scheme, its future prospects or returns. Please read the Statement of Additional Information and Scheme Information Document carefully before investing.



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