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Raghav believes that a 10 year closed ended ELSS fund structure with an exit option after 3 years offers fund managers an opportunity to go further in the quest for alpha, thus enabling them to deliver strong performance. Also, staying invested for 10 years enables investors to reap the true rewards of long term capital appreciation. Read on as Raghav takes us through the investment case for the 10 year version of ELSS funds in general and the portfolio strategy of the new ICICI Prudential Long Term Wealth Enhancement Fund.
WF: What factors should investors consider when choosing between an open-end ELSS fund with a three-year lock-in vs. a 10-year closed-end fund which provides an exit after the three-year lock-in? What are the advantages of the latter and for what kind of investors would the latter be a better option?
Raghav: Both open and close ended ELSS scheme provides tax benefit to an investor by way of deduction up to the limits (Rs. 1.5 lakh) as specified under section 80C of Income Tax Act, 1961. While investing in a close ended fund, one of the factors that plays out to an investor's advantage is fund manager's ability to take investment calls with a 10-year view, which allows the underlying investment to achieve its true potential, as well as benefit from the effects of compounding. It helps investors achieve a superior investment experience.
Besides, they allow fund managers to venture into under-valued areas of the market that are not a part of the front-line benchmarks. This provides the leeway for fund managers to seek undervalued investments in undiscovered areas of the market where value-unlocking can be achieved. This makes the fund structure more advantageous to investors.
The same can be inferred from the performance of ICICI Prudential R.I.G.H.T. Fund which a 10-year close-ended scheme.
Source: MFI; CAGR - Compounded annual growth rate; Data as on Dec 19, 2017 Rebased to 100. Past performance may or may not be sustained in future. The information herein is solely for private circulation and for reading/understanding of registered Advisors/Distributors and should not be circulated to investors/prospective investors.
An investment of Rs. 100 has grown to Rs. ~437 vs Rs. 211 in Nifty 50 Index in approximately 8 years. The Scheme has delivered 20% in CAGR terms.
WF: What will be the portfolio-strategy and investment-style followed by ICICI Prudential Long-Term Wealth-Enhancement Fund?
Raghav: ICICI Prudential Long-Term Wealth-Enhancement Fund will have a..
Highly concentrated portfolio with high conviction bets: The top 7-8 companies will comprise about half the size of a portfolio. In this strategy, the fund manager takes high-conviction bets based on a thorough bottom-up stock-picking strategy, which looks at the full potential of scaling up the business. Strategy followed - Growth: Enables a fund manager to seek companies that can command a higher proportion of their markets or that are category growth leaders, where the benefits of economies of scale combined with operational efficiencies particularly play out. Flexi-cap approach: The scheme will be market-cap agnostic, providing a healthy mix of small- and mid-cap stocks.
WF: Markets are continuing to post new highs even as valuations look overstretched. Is this just a case of TINA-driven domestic liquidity coming into markets or do you see robust FII inflows too in our equity markets?
Raghav: True, the Indian markets are seeing robust inflows, particularly from domestic investors in the last few years. However, we expect the inflows to continue because of the structural changes in Indian macro-economics. For one, real interest rates are high, which lead investors to invest more in financial assets. We are not in a high-inflation environment, which means demand for physical assets will be low.
In the course of time, earnings growth of Indian companies will pick up and we are already seeing green-shoots in many sectors. Some of the big structural reforms are in place, and it is now only a matter of time before corporate earnings revive, which would take place in a year or two. Driven by this, there's no reason to believe that foreign investors will not invest in a larger way in Indian markets. Note, also, that foreign investors have been marginal sellers in the Indian market more because of the potential opportunities elsewhere. But, once Indian earnings have revived, foreign investors are likely to be attracted by the better Indian fundamentals.
WF: What is your market outlook for 2018, and how do you see factors such as oil prices, fiscal slippages and rising interest rates impacting our equity markets in 2018?
Raghav: From a valuation perspective, stock prices have run up significantly and valuations are hovering around their past averages. Having said that, the outlook for 2018 is fairly robust, driven by three fundamental shifts happening in the Indian economy. First, the first leg of heavy economic reforms is now behind and it's only a matter of time for earnings to pick up. Second, with the capacity utilisation levels are at multi-year low, a pick-up is likely in this space as utilisation improves. Third, inflation and macro-economic parameters are expected to pick-up in reasonable limits. Hence, markets are likely to remain buoyant.
WF: When you cast the initial portfolio of this fund, which sectors and themes are you likely to be overweight and why?
Raghav: While clearly there will be no over-arching theme that will dominate the portfolio, there are many sectors with sufficient potential for scaling-up and expanding their balance sheets. Some of the sectors that appear well placed from a very long-term perspective are autos and the auto-ancillary sector, where demand continues to be robust. As corporate and retail demand for credit picks up and as the financialisation of savings plays out, the financial sector is particularly well placed. Besides, traditional consumer sectors such as FMCG and retail are in a strong position to expand in the coming decade. We believe these sectors will be particularly advantageous to investors in the long run.
WF: What has been your experience been with previous 10-year fund launches? What proportion of investors stay beyond the mandatory lock-in to truly enjoy the benefits of long-term investing?
Raghav: We have seen the benefits of staying invested for the long haul in similar funds. One of the funds, ICICI Prudential R.I.G.H.T (Rewards of Investing and Generation of Healthy Tax Savings) Fund has grown by a strong 4.37 times since September 2009. By comparison, the Nifty has increased only 2.1 times in the same period. In terms of CAGR, the ICICI Prudential R.I.G.H.T fund has delivered a compounded healthy 20 percent, showing that long-term compounding is highly desirable for investors.
Over the years, we have seen that sometimes investors tend to drop out of funds prematurely, thereby losing out on the benefits of scaling up, growth and compounding, which play out over the years. However, we believe that as investors warm up to the idea of long-term compounding and the added benefits of staying invested for long periods, we expect that investors will change their stance and stay invested for the entire duration of a decade.
Disclaimer
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
The information contained herein is only for the reading/understanding of the registered Advisors/Distributors and should not be circulated to investors/prospective investors. All data/information in this material is specific to a time and may or may not be relevant in future post issuance of this material. ICICI Prudential Asset Management Company Limited (the AMC) takes no responsibility of updating any data/information in this material from time to time. The AMC (including its affiliates), ICICI Prudential Mutual Fund (the Fund), ICICI Prudential Trust Limited (the Trust) and any of its officers, directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. The sector(s)/stock(s) mentioned in this communication do not constitute any recommendation of the same and ICICI Prudential Mutual Fund may or may not have any future position in these sector(s)/stock(s). Past performance may or may not be sustained in the future. Nothing contained in this document shall be construed to be an investment advise or an assurance of the benefits of investing in the any of the Schemes of the Fund. Recipient alone shall be fully responsible for any decision taken on the basis of this document
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