Last Updated on December 29, 2021 at 5:48 pm
After frustrating investors for the last few years, ICICI Prudential Value Discovery Fund has performed well in the last few months. Is this because of simply following the index? We investigate.
After investing in an actively managed mutual fund, all investors care about is a return higher than the index. It does not matter for them if the underperformance stems from the fund sticking to its mandate or if the outperformance stems from hugging the index.
In our Oct 2019 review – Is it time to exit ICICI Value Discovery & Quantum Long Term Equity? – we had pointed out that a value strategy can be often frustrating and only those who can keep the faith should invest in these. We had also pointed out these funds should change their benchmarks from normal cap-weighted indices to value-oriented factor indices.
ICICI Value Discovery did this in Feb 2020. The current benchmark is Nifty 500 Value 50 Index. This is significantly easier to outperform on an absolute and risk-adjusted basis as shown in the above article. From an investors’ point of view. for the extra fee paid, the outperformance must be with respect to a normal index like say, Nifty 500 TRI.
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One-year rolling return of ICICI Value Discovery and Nifty 500 is shown below. The region under the arrow shows 4-5 year period during which the fund returned less than the index. This has changed from April 2020 (green rectangle). This does not mean the tide has turned but from April to Oct 2020 it is a matter of fact that the fund has done better.
Now the question to answer is, has the fund simply increased weight to stocks that have a high concentration in the index, say the Nifty. For example, Invesco India Contra Fund is today 5-star rated by VR. It holds 10.57% Reliance Industries which is the heaviest index constituent. Maybe this is contra to contra strategy!
From Jan 2017 to Sep 2020. Value Discovery Fund does not seem to have held Reliance. As of Sep 2020, the fund holds 8.9% of Infosys and 8.96% of Sun Pharma and 8.78% of Mahindra and Mahindra. As you can see from the graphs below, the weight history of Sun Pharma and Mahindra and Mahindra are significantly different.
Therefore the portfolio of ICICI Value Discovery is quite different from that of Nifty. It is also different from Nifty 500 Value 50 index. For this factor index, Grasim (6.5%) and Hindalco (5.7%) are the top stocks. The fund holds about 3.4% of Grasim and 1.37% of Hindalco.
In summary, this “recovery” of Value Discovery without hugging the index is a welcome sign for its investors who waited patiently for a turnaround. How things will pan out in future is anyone’s guess.