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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