ICICI Pru Value Discovery Fund: Identifying the Potential of Undervalued Stocks

Welcome to  PersonalFN's weekly analysis on diversified equity mutual funds. In this issue, we have analysed ICICI Pru Value Discovery Fund, highlighting its performance, peer comparison, investment strategy, fundamentals, portfolio, and suitability.

ICICI Pru Value Discovery Fund is the largest scheme in the Value Fund category managed by veteran fund manager Mr Sankaren Naren. It is a true-to-style value fund that has delivered superior performance across various market phases and cycles.

Past performance is not an indicator of future returns
Data as on June 07, 2023
(Source: ACE MF)

ICICI Prudential Value Discovery Fund has been a top quartile performer in the value style fund category across time frames. After witnessing a pro-longed underperformance between 2016 to 2019, the fund benefitted immensely from the substantial recovery witnessed in the value investment segment and has recorded a superior performance in the last couple of years. In the last 2-year, and 3-year time periods, ICICI Prudential Value Discovery Fund has outperformed the benchmark Nifty 500 - TRI by a margin of around 5-7 percentage points and has also outpaced the category average by a significant margin. Even over the longer periods of 5-years and 7-years, the fund has managed to generate a decent lead over the benchmark and the category average.

The fund's strategy of staying away from momentum-driven bets helps reduce the risk and enables it to outperform the benchmark and its peers. Consequently, ICICI Prudential Value Discovery Fund stands out in terms of risk-adjusted returns. Its volatility, as denoted by the Standard Deviation (14.22%), is the lowest in its category and much lower than the benchmark. Moreover, its Sharpe ratio (0.51) is currently among the best in the category and far ahead of the benchmark.

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Investment strategy of ICICI Prudential Value Discovery Fund

ICICI Prudential Value Discovery Fund is a typical value-style fund that endeavours to invest in stocks of companies available at a significant discount to their fair valuation. The scheme's investment strategy is based on the fact that the market does not always efficiently match a stock's price with its intrinsic value. The fund adopts a 'Bottom-up' strategy, to identify and select undervalued stocks based on an evaluation of several parameters such as historic performance, earnings, book value, free cash flow, and dividend yield. Management, business competitiveness, and growth prospects of companies are a few other aspects that are considered by the fund manager.

ICICI Prudential Value Discovery Fund is mandated to invest at least 65% of its assets in equity & equity related instruments while the balance can be in debt and cash. It also has the flexibility to invest some portion in offshore equities. The fund strictly sticks to its investment mandate and prefers to stay fully invested in equities. ICICI Prudential Value Discovery Fund aims to maintain a well-diversified portfolio with the flexibility to invest across market caps and sectors. The fund maintains a large-cap bias, wherein it allocates around 65-75% of its assets. It also holds substantial allocation to mid-cap and small-cap stocks depending on the attractiveness of the valuation in each of these segments.

ICICI Prudential Value Discovery Fund 's portfolio is usually diversified across 60 to 70 stocks. As of April 30, 2023, the fund held 70 domestic equities along with a few overseas equities. The top 10 holdings accounted for around 47.2% of its total assets. Sun Pharma is currently the top equity holding in the fund's portfolio, closely followed by ONGC, NTPC, ICICI Bank, and Bharti Airtel. ICICI Prudential Value Discovery Fund also holds some exposure to Rights. The fund has recorded a moderate turnover rate of 55-85% in recent months.

ICICI Prudential Value Discovery Fund currently holds an allocation of about 5.1% in overseas equities holding stocks of companies such as Viatris Inc. and British American Tobacco Plc., and ADRs/GDRs of Vodafone Group Plc.

In the last two years, ICICI Prudential Value Discovery Fund has benefited the most from its holdings in Sun Pharma, Mahindra & Mahindra, NTPC, ITC, and Bharti Airtel that have together contributed over 20% to its absolute gains in the last two years. The fund has also gained from its exposure to ICICI Bank, ONGC, Axis Bank, SBI, The Great Eastern Shipping Company, and HCL Technologies among many others.

ICICI Prudential Value Discovery Fund's portfolio is well-diversified across Cyclical, Defensive, and Sensitive sectors. Around 13.9% of the fund's assets are allocated to stocks in the Banking sector with another 9.9% in Finance. It also holds substantial exposure to Pharma, Power, Infotech, Oil & Gas, Auto, and Telecom having allocation in the range of 5-11%. The top 5 sectors account for about 49.4% of its assets.

Suitability

ICICI Prudential Value Discovery Fund's track record of identifying discounted sectors and picking quality undervalued stocks has proved to be rewarding in the long run. The fund follows a 'buy-and-hold' approach and remains unmoved by the market momentum. The cautious investment strategy and exposure to undervalued and defensive sectors help the fund to limit the downside well during extreme market corrections.

ICICI Prudential Value Discovery Fund has a veteran fund manager, Mr Sankaren Naren, at helm, who is known for his high-conviction value bets. As it takes time for undervalued stocks to be discovered by the market, certain bets of the fund may not pay off immediately. Hence, the scheme may witness bouts of short-term underperformance.

Value as an investment strategy deserves patience to discover the full potential of undervalued stocks. Hence, ICICI Prudential Value Discovery Fund is suitable only for investors with a high-risk profile and an investment horizon of at least 5-7 years.

Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.

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About the Company including business activity

Quantum Information Services Private Limited (QIS) was incorporated on December 19, 1989.

QIS was promoted by Mr Ajit Dayal with an objective of providing value-based information/views on news related to equity markets, the economy in general, sector analysis, budget review and various personal products and investments options available to the Public. It was the first company to start equity research on an institutional level.

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Disciplinary history

There are no outstanding litigations against the Company, its subsidiaries and its Directors.

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Details of associates

1. Money Simplified Services Private Limited;

2. PersonalFN Insurance Services India Private Limited;

3. Equitymaster Agora Research Private Limited;

4. Common Sense Living Private Limited;

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6. Quantum Asset Management Company Private Limited;

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11. HYNGO India Private Limited;

12. Suresh Lulla;

13. I V Subramaniam.

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