April 17, 2018

The Strange Investment Choices of ICICI Prudential MF

A couple of days ago, one of my frequent collaborators happened to examine the latest portfolios of the equity and hybrid schemes managed by ICICI Prudential MF (I-Pru).  While doing so, he was baffled by some of the investment choices across the portfolios.  When he shared those with me, I too, was puzzled.  In this post, I present a glimpse of some of the things that left us confounded. 

Investments in ETFs
Why should an actively managed scheme invest any of its money in an index fund or an ETF?  To me, it’s ‘lazy investing’, and not in a nice way.  One of the key reasons for choosing an active fund manager is for his/ her security selection skills.  Thus, for an active fund manager to dump an entire index into a portfolio is not acceptable to me.  Yet that’s what has been happening across some schemes of I-Pru. 

For some time now, the fund house has been holding units of Bharat 22 ETF in the portfolios of several schemes.  Currently, if I am not mistaken, as many as 13 schemes hold units of this ETF.  Leave aside its merits as a passive investment.  It’s impossible to believe that all stocks that make up the index that it mirrors, are simultaneously worthy of inclusion in an actively managed scheme, and in the same proportion as they exist in the index.  In addition, I find it hard to buy the idea of having it in both their Value Fund series of schemes as well as their Growth Fund series of schemes.  Equally perplexing is its presence in the portfolio of ICICI Prudential Balanced Fund which also holds 15 of those 22 stocks.  Yet, according to another of my collaborators, there may be reason to all of this.  According to him, these schemes might be being used to enhance liquidity in the ETF.  As evidence, he pointed us to the fact that the number of units of Bharat 22 ETF held by Balanced Fund, for example, have seen inexplicable fluctuations, over the past few months.  Personally, I think that I-Pru would do well to clear the air on this.

That’s not the only ETF that the fund house has put investors’ money into.  As per the latest disclosure, ICICI Prudential Balanced Advantage Fund holds units of three other ETFs with each of which, it has several stocks in common.  These are Midcap Select ETF (12 stocks in common), Nifty Low Vol 30 ETF (24 stocks in common), and NV20 ETF (18 stocks in common).

Investments in FMPs
Beyond investing in ETFs, there is another odd investment choice that is common to Balanced Fund and Balanced Advantage Fund.  Both these schemes (along with ICICI Prudential Equity Income Fund) also hold investments in four ~3 year FMPs that were recently launched by I-Pru.  The total value of the investments in those FMPs adds up to ~574 crore.  Notably, these schemes hold ~25% of the AUM of three of those four FMPs.  So what made the fund house invest such a vast amount of money in its own FMPs?  What about the lack of liquidity in these FMPs?  Could the money not have been invested directly into the underlying securities?   These are all questions which only I-Pru can answer.

Investments in Index Futures
This relates to one specific scheme- ICICI Prudential Growth Fund – Series 3, a closed-end equity fund.  As on 31 March, the only equity exposure in the scheme was through Nifty 50 Index Futures.  This accounted for roughly half of its portfolio, while the remaining half was mostly in short term debt instruments.  It is possible that this may be a temporary allocation but only time will tell.  Nonetheless, apart from the dubious merit of such a portfolio, it raises questions about the justification of charging an expense ratio of 2.51% in the regular plan of the scheme and 1.34% in the direct plan.

Investments in High Dividend Yield Stocks
According to the investment objective of ICICI Prudential Dividend Yield Equity Fund, it can be expected to have a portfolio of equity shares “which offer attractive dividend yield”.  As far as I can make out, none of their other schemes has a similar objective.  Yet, based on the latest disclosures, by my count, the portfolios of 14 of their actively managed equity schemes have a higher average dividend yield than that of this scheme.  In other words, it would seem that the stocks most deserving to be a part of this scheme’s portfolio are being held in the portfolios of other schemes.

Investments in ICICI Securities
Okay, so this was not spotted by my collaborator or by me.  We read a report that suggested that I-Pru had “rescued” the IPO of ICICI Securities.  That led us to look at the substantial investment made by I-Pru in shares of ICICI Securities.  What we then saw, left us flummoxed.

For one, it appears that I-Pru is exceptionally bullish on the prospects of ICICI Securities compared to any other fund house.  Based upon the data that we saw, as on 31 March, its investments in this stock were more than three times that of any other fund house.  What’s more, its investments were larger than the combined investments of 7 of the 9 other fund houses holding this stock.  Secondly, though the stock would be classified as mid-cap (based on SEBI’s new classification), the only open-end diversified equity scheme of I-Pru that has bought this is Focused Bluechip Fund (unless of course, you count Balanced Advantage Fund).  Among other things, it begs the question that if it is indeed such a great stock to have, why aren't the mid-cap and multi-cap schemes of I-Pru holding this?  Yes, among the closed-end schemes, I-Pru did buy this in one of the schemes under its ‘Value Fund’ series.  But then, assuming that scheme is a ‘value fund’, as the name would suggest, we’re scratching our heads over how this stock constitutes a ‘value buy’, so to speak.

Thankfully, neither of us has investments in any of the schemes referred to, in this post.  Regardless, we think that I-Pru owes a fair bit of an explanation to its investors.

Special thanks to Robin Jehangir for highlighting most of the observations in this post.

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