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Recent performance of Value Discovery Fund due to expensive markets, says Mrinal Singh of ICICI Prudential Mutual Fund

“In value investing, patience is a prerequisite to reap gains. That is why it is important for investors to stay put with their investments whether through SIP or otherwise. As value gets unlocked investors will be beneficiaries of exponential gains from these investments,” said Mrinal Singh, Deputy CIO- Equity, ICICI Prudential Mutual Fund, in an interview to Avneet Kaur of

ICICI Prudential Value Discovery Fund is underperforming its benchmark in one-, three- and five-year horizons. The scheme has given -8.60 per cent in the last one year, 3.31 per cent in the three-year period and 6.27 per cent in five years. What is the reason behind the underperformance?
The recent performance of ICICI Prudential Value Discovery Fund has been a function of the markets being expensive without the data being supportive. We have avoided names where the valuations are stretched and are invested largely in names/sectors which we believe currently offer value. The fund’s performance in 2017 has been a drag on its mid-term performance. 2017 was the year when the fund was reducing weight in mid and small-cap, which was leading the market rally. The higher allocation to large caps relative to mid and small-caps and higher-than-average allocation to cash also hindered the fund’s returns when compared to its peers. This was a valuation call which in hindsight was ahead of the market. In 2018 when the broader markets cracked, the performance of the fund improved owing to its underweight stance on mid and small-cap companies. Since then the performance has been steadily improving.

In value investing, in order to reap gains from value unlocking, patience is a prerequisite. That is why it is important for investors to stay put with their investments whether through SIP or otherwise. As value gets unlocked investors will be beneficiaries of exponential gains from these investments.

For example: In 2014, when the market was up 39 per cent, the fund delivered 73 per cent. Similarly, in 2009 when the market gained 88 per cent, the return generated by the fund was 129 per cent. So, a triple digit return has been a reality for this fund in the past. All the figures are in comparison to S&P BSE 500. When compared to the Nifty, the return profile will be even higher.

Wealth Creation Journey

Data Source: MFI; Data as of August 30, 2019. Returns in CAGR % terms. Values for S&P BSE 500 TRI are available from June 29, 2007.

5-Year Rolling Returns

Data Source: MFI; Data in % CAGR terms

The scheme has managed the market downsides well in 3-, 5- and 10-year periods, shows the data from Morningstar. Still, the scheme failed to generate positive alpha. How do you explain this phenomenon?
Over a decade, the fund has delivered a CAGR of 14.10 per cent and on 15-year basis, the fund has generated a CAGR of 18.75 per cent. (Data as on September 03, 2019) and has been the category topper.

We believe downside protection is very important in investments. For example, if you had invested in Nifty on 1st January 2007, you would have made 50 per cent returns by the end of calendar year. So, Rs 100 would have become Rs 150. In 2008, when the Nifty corrected by 50 per cent, Rs 150 becomes Rs 75. In order to recoup to Rs 150 again the index needs to generate 100 per cent return. Hence, preserving capital in equities is very important. The risk in equities can be high, as permanent loss of your capital is possible. Because of this I am concerned about the buying price and the margin of safety. This approach has been helpful for the fund on longer duration especially when one looks at 10- and 15-year durations.

In terms of performance, the 2017 data has significantly dragged our mid-term (3 and 5 years) data. The problem with point-to point returns is that it changes every day. Internationally, the fund performance is looked in terms of quartiles which I believe is a better approach as the data in it does not change every day.

The index earning over the last five years has been around 6 per cent CAGR. The earnings data here has not been very supportive. So, barring the recent times, our 5-year performance has always been good.

Source: Morningstar

Many investors, rightly or wrongly, believe the scheme’s size is the reason behind its patchy performance. Do you think size is an issue? Though the scheme has witnessed some redemption in the last few months, ICICI Prudential Value Discovery Fund is still the biggest fund in the value-oriented category with assets worth Rs 14,959 crore.
Given our strategy, the scalability factor is far higher. The investment approach of the fund is essentially to invest against the street in terms of building or relinquishing our position. Therefore, the scalability of the strategy is far higher. What is critical here is buying at the right price and then being patient. For instance, an investment is made at Rs 2 and it goes to Rs 6, the gain made is three times but if the investment was made at Rs 4 and it moves to Rs 6, the gain is just 50 per cent. Between buying and selling, buying at the right price is the most important step.

The current problem is not related to the size of the fund but has more to do with where the market is. And the second problem is investor patience. Currently, the market risk reward does not look great which is a cause of concern. Otherwise, managing five times the money too is not a problem.

The scheme is still a category topper in seven and 10-year periods. Are you comfortable with this performance record?
ICICI Prudential Value Discovery Fund, as the name suggests, follows the value style of investing, a strategy which has worked well for investors over the last 15 years. The strategy here is to invest in names which offer favourable risk reward, high margin of safety: that is, valuation comfort, robust corporate governance and business potential. At times when a particular business enters a tough phase, we look at the overall capability of the business as to its ability to withstand and overcome challenges. If the company can pass this scrutiny, then being patiently invested is likely to deliver rich rewards in the years ahead. This has been the approach taken when it comes to managing the value fund.

In the past, we have gone through phases where a strategy underperforms and is accompanied by steep market PEs, but we tend to stick to the time tested ways of investments which have proved to be beneficial for investors over a complete market cycle. The same is evident in the long term returns of the fund if one were to look at 7-, 10-years and even higher investment tenures. In fact, this fund has rendered the largest compounding returns in its category and is at the top funds in the industry itself.

Globally, value strategy has worked well and in India ICICI Prudential Mutual Fund has been the flag bearer of this category, which we believe has worked well for our long term investors. We strongly believe that value is the right approach to investing and we continue to practice this strategy through market cycles.

In equities, the trick lies in compounding, so a 10-year time frame is excellent. A 15 per cent CAGR is a doubler in five years and 20 per cent CAGR is three times in five years. However, market volatility scares away most of the investors. Investors need to realise that over longer time horizon, volatility gets subsided. For a young society like ours, investors should be looking predominantly at investing into equities through SIP.

ICICI Prudential Value Discovery Fund has a tilt towards large caps with over 80 per cent of the portfolio invested in them. What is the strategy? Will the scheme continue to follow the same allocation?
Being conservative is remunerative in equities as future return is a function of preserved capital especially when compounding kicks in. Historically, the fund has been mid and small-cap oriented. Going forward too we will be adding mid and small-cap names whenever the opportunity arises. From a fund perspective, the idea behind investing in a mid-cap business is that it will grow to become a large cap in future.

Who should invest in Value Discovery Fund? What is the ideal investment horizon for investors who want to invest in this scheme? What can they expect from the scheme?
The average holding period of the fund has been around 4 ½ to five years because our average turnover ratios have been around 20 odd per cent. For a value fund, an investor should be invested in for at least five years. Rolling return analysis shows that if one remains invested for seven to 10 years, the probability of making double-digit compounded returns is very high.

We generally communicate that our expectation of investor time horizon is in excess of five years. This is because the beauty of equity investing is in compounding. For a young demography like ours, the biggest asset is that investors can stay invested for the next decade or more. If an investor has narrowed down on a strategy like ours which is highly remunerative over a decade, the next most important thing is to be patient. If one does not need the invested capital then its best to leave it invested as compounding will help the capital to grow exponentially.

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