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COVID correction an opportunity to hike exposure to specific sectors from a 3-year perspective: ICICI Prudential AMC

Senior Fund Manager, Prakash Gaurav Goel, gives his take on the mid-cap space and the path for revival in corporate earnings

April 27, 2021 / 02:31 PM IST

Mid and small-cap funds have done well over the past year, partly on account of a broader market recovery and partially due to expectations of an economic recovery. ICICI Prudential Mid-cap Fund has been one of the better schemes within the category. Prakash Gaurav Goel, who is the Senior Fund Manager at ICICI Prudential AMC, takes care of the mid-cap as well as the ICICI Prudential Focused Equity Fund. He took charge last year. He talks to Vatsala Kamat and explains the resurgence in mid-cap funds and why investors cannot afford to ignore this segment.

ICICI Prudential Midcap Fund gave 79 percent return over the past one year. But now, the second wave of COVID-19 is threatening to derail economic growth. Would you change courses in your funds?

Given the overall low growth seen over the last four to five years, we are in the midst of a recovery cycle in sectors such as metals and real estate. These sectors are supported by large spends in infrastructure to boost the economy, coupled with an accommodative monetary policy. This situation is similar to that of 2003-05.

Also read: Massive gains in small-cap mutual funds: Is it time to take some profits?

From here, corporate profitability is likely to improve. Meanwhile, I see a few trends panning out such as consolidation in sectors such as multiplexes, aviation and diagnostics, leading to efficient companies emerging stronger. Another trend could be lower credit cost for the financial sector, as and when the cycle turns for metals and real estate. As a result, over a period, tapering of non-performing assets (NPAs) will lead to better earnings.

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In this backdrop, while the last one year has been favourable for mid-caps, we still continue to see incremental opportunities. After the recent correction due to the second wave, many stocks across sectors are well-placed for an uptick. So, this correction is an opportunity to increase exposure to specific sectors from a three-year perspective.

You appear optimistic about the equity markets

Over the next couple of quarters, volatility is likely to persist. But, compared to last year, this time around, we have a vaccine in sight. There has been significant improvement in countries such as the UK and US, where vaccination has been widespread, indicating that India too will soon follow suit. The moment we have a glide path visible, the sentiment in Indian markets is likely to improve.

What leads you to book profits in your mutual funds?

We focus on risk-adjusted return. If the stock has done well, we evaluate the potential for incremental return over the next three years. Bottom-up analysis will help determine whether to sell or to adjust the stock weightages. That apart, we also evaluate the sector.

For example, at this juncture, hotels are under pressure, but hospitals are benefitting, given prevailing pandemic and this is reflected in their respective stock prices. I believe this trend will reverse and hotels as a space will do well eventually and would lead to good reversal in stock prices.

Being mindful of these trends and opportunities is the key to booking profits or switching between stocks.

You took over managing the Mid-cap fund a little over a year ago. ICICI Prudential Focussed Equity Fund has nearly doubled its mid-cap holdings. Any other changes that you’ve made in the two schemes?

In ICICI Prudential Focused Equity Fund, the changes were few. To benefit from an economic recovery, we increased allocation to financials over the last three months.

In ICICI Prudential Midcap Fund, till a year back, the fund’s portfolio had significant exposure to public sector units (PSUs), travel and tourism stocks, to name a few. Also, the weightage assigned to chemicals and pharmaceuticals was low. We shuffled the portfolio and increased weightages in some high-quality companies and some others, where we saw promise from a medium-term perspective.

In the current markets, isn’t it challenging to manage a concentrated fund and deliver alpha, when there is limited ability to diversify the portfolio and risk?

Sometimes, market movements are fairly narrow where some stocks are over-rewarded and others are ignored. Here’s where a fund manager can generate returns far higher than the benchmark. A lot also depends on how well we assess the incremental return over a three-year or five-year period.

Having just 30 stocks (the maximum a focused fund can hold, as per SEBI rules) forces us to ignore certain stocks, even though they might be index heavyweights. When our research calls play out, that’s when we outperform the benchmark indices by a large margin.

Must an investor own a mid-cap fund? Is the risk worth the while?

Some companies or industries can only be found in the mid-cap segment. For instance, many industry leaders in businesses like air-conditioners, diagnostics or hotels, are mid-sized companies. Many of these companies have a large scope to increase their market share; their growth potential is tremendous. We must not be stuck with just one type of market capitalization.

Over last decade, about 34 mid and small-cap companies have become large-caps. While there is better liquidity in large caps, multi-baggers are generally from midcaps, provided the stock selection is right and investors have patience.
Vatsala Kamat is a freelancer. Views are personal.
first published: Apr 27, 2021 02:24 pm

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