Value-based approach:: Business Line

�� -->

Investors looking to add a mid- and small-cap fund to their portfolio can consider ICICI Pru Discovery. It is true that mid and small-cap stocks have been dealt a heavy blow in recent times. But Pru Discovery invests in stocks trading at lower price-earnings multiples, a plus point in the current choppy market mood. Its February portfolio sports an average PE of 11 times, well below its benchmark CNX Midcap PE of 16 times.

This value-based approach helps the fund pick stocks which have the potential to be re-rated in upswings. At the same time, the scheme avoids those stocks that move up quickly far ahead of earnings potential and plummet during downturns. A tendency to stay invested in equities at over 90 per cent across cycles also aids in catching stocks at lower prices.

That said, given that mid- and small-cap stocks are generally a riskier bet than large blue-chips, investors can consider using the SIP route to ride out market swings.

PERFORMANCE

The fund is among the top performing mid- and small-cap oriented schemes. Its one-, three- and five-year returns beat the CNX Midcap index by a hefty margin of 9-15 percentage points. During the two previous market downswings, the fund’s losses were well short of its benchmark.

In the bear phase that gripped the market in 2011, for instance, the fund fell 26 per cent compared with the 36 per cent loss sustained by the CNX Midcap index. ICICI Pru Discovery is among the top three funds in the mid- and small-cap category.

PORTFOLIO

Over 60 per cent of the fund’s portfolio is invested in stocks with market capitalisation of less than Rs 7,500 crore. Risks are relatively spread out with the top three sectors rarely making up more than a third of the portfolio. Banking stocks have always featured among the top sectors in the fund’s portfolio.

The scheme’s focus on value saw it shedding stocks of pharmaceutical and software companies in 2012. The pharmaceutical sector, for instance, now accounts for just about 6 per cent of the portfolio, compared with the 17 per cent with which it started out the year.

The fund, instead, picked up stocks in construction, capital goods and oil and gas, which have been beaten down. The plumped-up fast-moving consumer goods stocks also didn’t feature significantly in the fund’s portfolio.

Other timely calls include adding to sectors such as auto ancillaries, power and textiles in 2009. Stakes in the latter two segments were also pruned in time over the subsequent two years. The fund moves in and out of sectors such as refineries and telecom.

Unusual stock picks include Vardhman Textiles, Rain Commodities, BL Kashyap & Sons, Voltas and Siyaram Silk Mills. Timely stock additions include Bharti Airtel, Max India, Amara Raja Batteries and Balkrishna Industries.