ICICI Prudential India opportunities fund: Avoid or wait & watch

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The NFO of ICICI Prudential India opportunities fund (open-ended) is set to open on Dec 26th 2018 (to Jan 9th 2018). This fund is a thematic special situations fund with high risk than a diversified equity fund. Here is why you should avoid this fund or wait and watch for it to perform.

ICICI Prudential India opportunities fund: Objective & strategy

The Key information memorandum (KIM) states:

To generate long-term capital appreciation by investing in opportunities presented by special situations such as corporate restructuring, Government policy and/or regulatory changes, companies going through temporary unique challenges and other similar instances

It can invest anywhere between 80-100% in special situations equity (defined as above) including derivatives. The rest can be in normal equity, mutual funds and bonds. It can also invest in international equity and bonds.

The KIM further states the investment strategy as:

The scheme follows a blend of value and growth style of investing. The fund will follow a bottom-up approach to stock-picking. The scheme will invest in stocks with an emphasis on opportunities presented by special situations such as corporate restructuring, Government policy and/or regulatory changes, companies going through temporary unique challenges and other similar
instances.

ICICI Prudential India opportunities fund: Avoid or wait & watch cover image

Examples of special situations

In its presentation distributed to sales guys the AMC states (none of which are legally binding):

“A special situation is a unique situation that companies may face from time to time” and these are opportunities to a fund manager “who can foresee and interpret the implications of that opportunity”!

So now you know why the fund is designated as more volatile! If the fund manager gets it wrong or it takes too long for the call to pay, the investors will suffer. The presentation also showcases the following examples

Special situation due to a temporary crisis in a company

Causes like the following may affect an established business:

  • Regulatory changes
  • Management changes
  • Change in industry, higher competition
  • unfavourable business cycle/macros

Examples shown:

Diageo stake in United Spirits (2012) and the stock moving up

ICICI Prudential India opportunities fund

Infosys price falling down due to management change in Aug 2017 and subsequent price reversal

Infosys price falling down due to management change in Aug 2017 and subsequent price reversal

10% fall in Maruti Suzuki after a strike in July 2012 and subsequent upward movement.

10% fall in Maruti Suzuki after a strike in July 2012 and subsequent upward movement.

June 2015 Maggie lead controversy and its impact on Nestle price

June 2015 Maggie lead controversy and its impact on Nestle price

 Special situation due to a temporary crisis in an industry/sector

Internal Causes:

  • a new entrant (e.g Jio)
  • increased competition
  • domino effect

External causes

  • macroeconomic changes
  • Government pressure or regulation
  • global pressure

Examples:

Falling rupee affecting IT and export companies stock price favourably

Falling rupee affecting IT and export companies stock price favourably

Special situation due to a temporary crisis in the economy

Movement in macroeconomic indicators like inflation, fiscal deficit, exchange rates, crude oil price etc.

Example:

Fall in crude oil price and upward movement of stock prices (e.g paint companies that operate across sectors)

Fall in crude oil price and upward movement of stock prices (e.g paint companies that operate across sectors)

Special situation due to government action or  regulatory changes

Examples:

  • policy change or reform
  • tax laws
  • change in regulations
  • fiscal reforms

E.g: Impact of demonetization on financial services stocks

 Impact of demonetization on financial services stocks

Special situations due to global events or uncertainties

Changes in foreign economies affecting Indian stocks like the slowdown in Chinese economy affecting Indian metal and commodity stocks.

slowdown in Chinese economy affecting Indian metal and commodity stocks.

Observations

ICICI Prudential India opportunities fund wants to present itself as an alpha generator by trying to unearth opportunities such as those listed above asap. It claims the following attributes are necessary to manage (and therefore invest) in such a fund

  • Willing to dispute conventional wisdom (meaning buy a falling stock)
  • Invest in stocks that have a negative correlation with the economy (countercyclical) or stocks that do well during recessions and not during an economic boom
  • find winners in negatively impacted sectors
  • conviction and focus on long-term objectives

This clearly indicates guaranteed high volatility with a potential for high reward. Most mutual fund investors clearly do not possess the stomach or patience for this kind of fund.

The older version of the presentation for ICICI Prudential India opportunities fund shows two examples of special situation investing (new version linked at the top of the post does not have these):

  1. Increase in exposure to ITC after May 2017 when its stock price fell (ICICI Dynamic fund now called Multi-asset fund)
  2. Increase in exposure Infosys after July 2017 when there was uncertainty in management  (ICICI Balanced fund now called Equity and Debt fund)

While there is no doubt about Sankaran Naren’s ability to spot such stocks, there is no need to buy a fund exclusively for that! Since their established funds are doing a bit of that already. I think that is good enough for investors. If ICICI can do this, other fund houses can and are also investing in such stocks.

Also, the examples shown above are cherry-picked ones that have worked (hindsight bias). The fund manager could have easily got it wrong or it would have taken the stock too long to move up and justify the purchase. Interested investors must understand these risk before considering ICICI Prudential India opportunities fund. My advice is to avoid or wait and observe the volatility (not returns) for a couple of years before taking a small exposure (therefore might as well avoid!)

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