What is wrong with ICICI Prudential Value Discovery Fund?

A so -called bull market reveals interesting behavioural traits. The worry about the dip in performance of ICICI Prudential Value Discovery Fund is part fact and part behavioural (in my opinion, of course). A look at the performance of this fund.

One feeling a bull market brings about is, “why is my fund alone not performing when all other funds are giving huge returns?” Another is the feeling that the “bull run” will never end. It suddenly seems to investors that “this is how it is going to be, from now on” (until it all comes crashing down).  When both of them combine it suddenly feels as if I am holding a dud fund and that I must immediately exit and choose funds that has given “others” 29.5% in the last year and 43% in the last six months.

Diversification is for idiots. That is the plain truth of the matter. When the “entire market” (read index) is moving up, all my funds also should move up, no?

ICICI Prudential Value Discovery Fund supposedly follows “value investing” principles. It takes “contra” views and all value funds underperform during bull markets. This is the wisdom many experts want us to believe.

Now, I like numbers because they are not subjective (if the onlooker is objective). So to hell with all this value investing vs growth investing arguments. A simple Google search will reveal in under a minute that there is no clear definition of what a value stock is and what a growth stock is. So there is no pointing debating about the fund’s strategy. We have no idea why the fund manager (or is it management with Naren keeping in eye?) purchase the stocks in the latest factsheet. So why bother speculating?

An investor worried about this funds performance should instead ask why they purchased this fund in the first place and what is its role in the equity portfolio? An investor who cannot answer these questions, especially the second one, need help!

Now let us take a deeper look. This is a snapshot from the latest factsheet.

The undperformance over the last 1Y, (a little more than 2Y if you use Value Research scroll bar) is real. There is no question about that.

Question is, should you then get rid of this fund?

I generally avoid looking at 1Y rolling returns data as it is noisy for most funds. For this fund though, this is how it looks vs BSE 500 price index.

The normalised NAV movement during this period is shown below.

Wait a minute. This is just the price index. Let us include dividends in the BSE 500 and consider the total returns index (TRI).

I see a more than reasonable consistency in the funds 1Y performance (rolled over from April 2006 to July 20th). When the market zoomed up, the fund has not done well. Notice the underperformance in the normalised NAV prior 2008.

On the other hand. the fund has beat the market quite well during sideways markets.  I don’t know about you, but I like what I see and think there is no reason for alarm with regard to its recent underperformance. There is no factual evidence to suggest a big change in its performance traits.

For those who believe in the Sensex Staircase  (short burst in growth, followed by years of sideways markets), for those who understand that what goes up will have to come down, this fund is a fantastic choice.

Returns in equity are highly nonlinear. A few bad years can be erased by a good year and vice versa. So if you cannot stomach such underperformance than add a fund which just does the opposite – beat the market when it goes up and not when it goes down (fall less). It is not hard to find such funds. Perhaps they are called “growth fund”? I don’t know you will have to ask the experts.

Verdict: Don’t worry about the performance of this fund. If you trust that it will stay true to its character, then hold on to it. Not all funds should perform during a bull market. Then your portfolio is not diversified – if you believe in such nonsense that is.

Disclosure: No ties with ICICI, no holdings in this fund.

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Updated: July 21, 2017 — 10:39 am

10 Comments

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  1. Pattu Sir,

    Sorry for the intrusive question. Earlier you had mentioned you hold HET, FIBF, QLTE and PPFAS in your retirement portfolio and HT200 and IPVDF in your son’s portfolio. Can you please let us know which ones you are holding now. You recently mentioned that you have added 2 balanced funds. Sorry if i offend!

    Another superb article though. Just 3 years back everyone was latching onto to IPVDF and Axis LTE. Now they are worried about performance. Something similar may happen with SBI Bluechip soon too

    1. I am not offended but I fail to see how this information will be of any use! I did not say I added two balanced funds. I said I have built a balanced fund centric folio.

  2. I think Value Discovery will continue to perform poorly until Pharma (10.99%) and Tech (15.95%) don’t do well. S.Naren clearly believes Pharma and Telecom and to some extent IT to perform well over long term and is his contra bets now…

    Above numbers are from Jun-2017 fact sheet

    1. I have no idea why any fund manager picks any stock so refrain from commenting about the portfolio

  3. ICICI Prudential Value Discovery fund was a mid cap fund earlier before it became a multi-cap. Now that it’s a multi-cap fund I am not sure how that affects any inferences that we make looking at 5/7 years data.

    1. The fund has no cap bias. These classifications are artificial.

  4. Dear Prof,
    It is a value fund and we should expect to under-perform a little during bull markets (has been more than a year now). But the next question is how long should one stick to it if it continues its under-performance? For other regular funds, we wait for a year to see if there is a turn around.

    Pradeep

    1. 1) I dont know how to distinguish a value fund from a growth fund.
      2) I dont know any formula with regard to how long one should wait for a turnaround. It is a personal call.

  5. Dear Professor
    Please analyse nanocap (dspbr micro cap) too which was/is dear fund, becoming dearer of late
    Regards
    D Mundra

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