A 360 degree portfolio review coverage on ICICI Prudential Focused Bluechip Equity fund as of Dec-2011.

1. 21 Buddha
...Connecting the dots
Fund Review- ICICI Prudential Focused Bluechip Equity
December 31, 2011
Category: Large Cap
Benchmark: S&P CNX Nifty
Inception Date: May 23, 2008
Fund Manager: Prashant Kothari
Total Net Assets: INR 3532.2 crore
as on Dec 31, 2011
NAV: INR 14.52 as on Dec 31, 2011

2. Fund House Pitch
“Diversification is needed to reduce risk, but too much
diversification can result in diminishing returns. Therefore, it
makes sense to strike a balance between minimum risk and
maximum returns, which is what a focused fund does. By investing
in the largest companies because of an outlook that they will be
the most stable through any situation, it strives to grow your
wealth in the long run.”
“ICICI Prudential Focused Bluechip Equity Fund, an open-ended
equity scheme, aims to maximize long-term total returns, from a
focused and optimally diversified portfolio that is invested in
equity and equity related securities of about 20 companies
belonging to the large cap domain. This strategy has the potential
to generate positive returns from being overweight on certain
high conviction stock picks.”
Investment Philosophy
This fund invests in about 20 equity and equity related securities,
and seeks to generate long term capital appreciation. The
portfolio is mandated to select stocks from among the Top 200
stocks in terms of market capitalization on the NSE. This fund
adopts a bottom-up approach to Stock Selection and the fund
manager has the flexibility to choose between stocks across all
themes, sectors and investment styles.
2011 Period
My Analysis
This fund was launched in May 2008. As we could recall that year
wasn’t just the year of the bear but also the year that witnessed
one of the most terrible bloodbaths for Global equities in our
recent memory. Most market players were shying away from
equities and taking refuge in cash, gold and debt instruments. But
Prashant Kothari held a different view in those times, that he
capitalized on irrational market behaviour and took bets with
some large caps whose prices have fallen down during the
downturn but had promising business potential and healthy cash
flow position. When the market began to shown signs of recovery,
his portfolio was well poised to lead the charts. Since then, there
has been no looking back.
Since 2009 not only it has beaten the benchmark in every single
calendar year but also marched ahead in the peer category. In
2011, 2010 & 2009 it outperformed S&P CNX Nifty Index by
8.236%, 9.12% & 15.43% respectively.
2011 Period
Investment Approach
Since inception of this fund, he has invested in only 36 stocks.
More often than not he takes long position with his holdings. Due
to this approach, the Portfolio turnover ratio of this fund i.e. 0.38
times is quite low compared to its peers. However if an existing
holding looks overpriced beyond a level, he doesn’t hesitate in
booking profits. Prashant follows a bottom-up and an active
approach, he looks for Industry heavy weights but doesn’t have
any sector bias as such. As quoted earlier also he looks for
companies whose business model seems promising, exhibit high
corporate governance levels and the management looks trust
worthy. He uses a combination of DCF models and relative
valuation factors such as P/BV, EV/EBITDA, P/E, and PEG to
evaluate a company’s fair value. To cite instances, in Auto space,
he favoured Bajaj over Hero Moto or Tata Motors, given Bajaj’s
cheaper valuation & better profit margins. For similar reasons his
preference for PNB & BOB over SBI amongst Public sector banks
and Infosys over TCS in the Technology space is well justified.

3. He also has a strong dislike for highly leveraged firms, which
explains why he has always avoided Real Estate & Infrastructure
so far. On few occasions he has also taken contrarian bets in his
securities selection. Prashant keeps almost 5-10% of assets in
Equity or Index Futures to maintain liquidity and at the same time
maintaining equity exposure for the fund.
Holdings Analysis
As mentioned in AMC’s pitch, they do not believe in too much
diversification. The fund holds just 20 stocks comprising mostly
blue chips. As a truly active fund, the portfolio’s sector weights
remotely align with that of benchmark S&P CNX Nifty. See current
sector holdings below:
As end of Dec 31, 2011
As evident from the above pie chart, currently almost 64% of
assets are allocated amongst Energy, Financial, Technology &
Healthcare sectors. He does not hold any exposure to Real Estate
and Civil Aviation sector as those firms do not qualify his quality
filters like high corporate governance level, superior management
structure and low leverage. As of Dec 2011, Equity & Index futures
accounted for 5.19% of the portfolio & Cash levels stood at 5.64%.
Prashant’s high-risk specialized/concentrated strategy has paid off
investors so far. But it has also missed a couple of Sector rallies
like Metal’s bull run in 2009. BSE Metal index delivered 233.68 %
in 2009. Likewise the recovery of Tata Motors since 2008 has been
phenomenal, it has given 70.26% return annually over last four
years period. Unfortunately the Fund Manager failed to capitalize
on that true fairy tale instance. Inclusion of Idea in
Communications & HUL in the FMCG category would have
boosted Portfolio’s returns significantly in 2011 period as both
yielded 18.33% and 30.20% respectively for the calendar year. His
conviction for BHEL & ICICI Bank has not gone well for 2011
calendar as they were down by 48.61% & 40.21% respectively.
However both these stocks will surely cheer up long term
investors as ICICI bank is expected to post strong Q3 numbers on
the back of business recovery, improvement in NIMs & low
exposure to Telecom & Aviation firms whereas BHEL enjoys near
monopoly position in Capital Goods/Engineering space, it has
strong order book and also hold high cash levels.
A tour through Portfolio holdings throughout 2011 suggests that
Fund Manager has a quality bias, he prefers value (margins) over
volumes. In September, the Fund made an exit from TCS which is
IT sector’s new bell weather and has rather increased exposure to
Infosys despite its subdued performance on the charts recently. In
fact, as end of 2011 Infy held the biggest weight in the portfolio. It
has also added another Pharma names to the holdings list by
taking fresh exposure to Cadila in October month. It’s
undoubtedly amongst the big boys of the Industry, has had strong
top-line and bottom line growth last year, possess a well
diversified product portfolio besides a few promising drugs
(Generics) in the pipe line. The fund also completely sold off
Oracle Financial Services and Mahindra & Mahindra in October &
December month respectively.
Security wise Portfolio breakup
Company Sector
Weight
(% 0f
Assets)
1 Year
Return
Infosys Ltd Technology 9.44 -19.61
RIL Energy 8.37 -34.55
Wipro Technology 6.18 -18.84
Bajaj Auto Automobile 5.96 3.27
Cipla Healthcare 5.95 -13.49
Bharti Airtel Communication 5.08 -4.26
ITC Ltd FMCG 4.98 15.26
Bank of Baroda Financial 4.85 -25.8
Hindustan Zinc Metals 4.6 -12.54
Axis Bank Financial 4.34 -40.15
ICICI Bank Financial 4.12 -40.21
Power Grid
Corp Energy 3.85 1.83
Tata Power Energy 3.74 -36.11
Cairn India Energy 3.38 -5.56
ONGC Energy 3.18 -20.32
Grasim
Industries Diversified 3.18 6.23
Cadila Healthcare 3.06 -8.91
PNB Financial 2.05 -36.1
HDFC Bank Financial 1.44 -9.04
BHEL Engineering 1.42 -48.61
As end of Dec 31, 2011
Performance Analysis
As its name suggests, the scheme focuses on some of the finest
Industry heavy weights and thus has reaped the benefits of
stupendous recovery seen in the large-cap space after the market
meltdown in 2008. Having acquired most of its equity investments
at discounted rates in the second half of 2008, ICICI Prudential
Focused Bluechip Equity delivered 91% returns in 2009 as against
76% returns by its benchmark S&P CNX Nifty. It has consistently
beaten the benchmark in the last 3 years. Though being relatively
new, it has eclipsed the performance of some of Industry’s best
performing old names like HDFC Top 200, Franklin India Bluechip,
DSP BR Top 100 etc. No wonder why it was awarded with CRISIL
number one ranking in Open End Large cap Equity schemes
category. It also commands 5 star ranking from both Morningstar
& Value Research. It’s AUM has grown from Rs 1658.17 crore in
the beginning of 2011 to a massive size of Rs 3532.16 crore as end
of 2011, thereby clocking a growth of 113% in just one year. All
these factors reflect an impressive track record for the fund.

4. Period Fund Nifty Sensex BSE 100 MSCI India
1 M -3.01 -4.3 -4.15 -4.83 -4.38
6 M -12.95 -18.12 -17.99 -19.13 -18.9
1 Y -16.41 -24.62 -24.64 -25.73 -26.33
2 Y (Ann) 3.06 -5.71 -5.93 -7.32 -8.06
3 Y (Ann) 26.63 16.04 17.01 16.7 17.42
Period- Jan 1, 2009 till Dec 31, 2011
Top 5 Performing Constituents
Company Sector Contribution
ITC Ltd FMCG 0.76
Grasim Industries Diversified 0.20
Bajaj Auto Automobile 0.19
Power Grid Corp Energy 0.07
HDFC Bank Financial -0.13
Bottom 5 Performing Constituents
Company Sector Contribution
RIL Energy -2.89
Infosys Ltd Technology -1.85
Axis Bank Financial -1.74
ICICI Bank Financial -1.66
Tata Power Energy -1.35
As end of Dec 31, 2011
Relative Performance
Date Fund Benchmark
Out/Under
Performance
Jan-11 -8.52 -10.25 1.73
Feb-11 -2.96 -3.14 0.18
Mar-11 9.73 9.38 0.34
Apr-11 -0.65 -1.44 0.79
May-11 -2.86 -3.29 0.44
Jun-11 2.14 1.57 0.57
Jul-11 -0.84 -2.93 2.09
Aug-11 -8.52 -8.77 0.25
Sep-11 -0.07 -1.15 1.09
Oct-11 6.55 7.76 -1.21
Nov-11 -7.08 -9.28 2.21
Dec-11 -3.01 -4.30 1.29
1 Year Period -16.41 -24.62 8.21
In 2011, except for October month, the fund has always given
positive relative return over its benchmark. Those were extremely
volatile period for the broader markets. Even if we go beyond last
year, the fund has beaten both benchmark and category average
across various market cycles in last three years.
Since inception till Dec 31, 2011. Base taken as 10.
Other Quantitative Indicators
Average P/E: 17.79
Average P/BV: 3.38
Average Dividend Yield: 1.69
Average Portfolio Turnover Ratio: 0.38 times
Std Dev (Annualised): 22.82%
Sharpe Ratio: 0.78
Portfolio Beta: 0.85
R Squared: 0.97
Annual Management Fee: 1.25%
Total Expense ratio: 2.10%
 Portfolio turnover has been computed as the ratio of the lower
value of average purchase and average sales, to the average
net assets in the past one year.
 Risk-free rate based on the last 91-day T-Bill cut-off of
8.4782%.
Bottom-line for investors
The fund’s opportunistic investment in fundamentally sound
companies from attractive sectors has paid off investors really
well. Its investment rationale is tilted towards large cap-growth
flavour and committed to long term capital appreciation from
investments in selective blue chip stocks across various sectors.
The fund has outperformed the broader indices by fairly good
margins historically. Do consider this ‘aggressive large cap open-
ended fund’ while evaluating various mutual fund schemes for
your Equity fund portfolio and SIP your way to achieve long term
objectives. Please bear in mind that the fund has highly
concentrated portfolio, so investors with high-risk appetite can
consider investing in the scheme with a long term investment
view.
Disclaimer- Due diligence has been exercised in checking the authenticity of all figures mentioned in this report. But that does not
guarantee its accuracy or completeness. The recipient of this material should rely on his/her own judgment and take prudent decision
before acting on the above piece of information.
06-Feb-2012, © Saurabh 2011 (Saurabh Kumar|kaashyap.saurabh@gmail.com|+91-8374109195)