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Fund Manager
ICICI PrudentialFocused Equity Fund.
NFO Period: 8th April to 7th May

Ques1: What do you think about the state of Indian economy as to where it is headed?

Reply: Given the Q3FY08 GDP estimates of 8.4%, India is expected to meet the full year advance estimate of 8.7% for FY08. For FY09, we should be able to maintain our GDP growth rate at 8% levels. If global scenario does not deteriorate significantly & monsoon is good, India will show good growth prospect based on the consumption boost from the budget and on-going capex cycle. This is supported by efforts towards trying to add 70 GW of electricity in the next 3 to 5 years from current installed capacity of 136 GW and similar capacity addition is planned in major ports, refining, gas production, cement, steel, coal, aluminum etc. The positive outlook is supported by a number of contributing factors i.e. our exports-to-GDP ratio is fairly low. We have good liquidity in our banking system to fund our credit growth. Our savings and investment ratio at 35 % plus will also contribute to sustaining our growth based on the domestic liquidity. Going forward, inflation and global economic environment will have some impact on the growth rate. However, with RBI taking efforts to control inflation we expect the Indian Growth Story to continue. In the worst-case scenario of global downturn, India can still grow at about 7% based on domestic factors for FY09.

Ques2: How do you see corporate earnings for FY’09 and FY’10?

Reply: Industrial Production numbers, recently, have shown signs of a slow-down but we feel it an aberration rather than a trend and are still reasonable for over all GDP growth. Corporate profitability growth in 2009 will be lower than that seen in FY08 but that is already priced in to a reasonable extent. In terms of domestic economy we do not have much to worry about which is not factored into the prices at this level. There are certain event risks that could impact the corporate growth like the direction of interest rates in the upcoming credit policy, the monsoons and the upcoming election. Also how the sub-prime issues play out will impact the growth. These events could have binary outcomes and could thus impact the corporate earnings growth. The other worry which is there on corporate earnings growth is that treasury losses on various derivatives. How the numbers pan out will determine profitability growth.

Ques3: Which sectors look promising from one ot two years perspective.

Reply: Sectors related to the consumption and infrastructure themes look promising over the medium to long term horizon. These two themes are basically driven by domestic growth and have less dependencies on external factors.

Ques4: In the budget auto, pharma and technology sectors were the main beneficiaries. What do you think about these sectors.

Reply: Again, these sectors are related to the consumption and infrastructure themes and hence are expected to do good in the medium to long term. The added thrust by the budget to these sectors only adds to the good outlook. Other macro factors like domestic interest rates, etc. will have a bearing on the performance of these sectors.

Ques5:Will the global volatility subside and when it is expected

Reply: The current global market turmoil is the outcome of the subprime issue which started early last year. Total losses are estimates to be in the range of USD 400 to 600 billion with provisioning of about USD 230 billion and fresh capital of about USD 100-150 billion raised. According to some estimate for every $1 written off, the balance sheet needs to be cut down by $12.5. The Fed has been pre-emptively cutting rates to contain the downward spiral. It has also been providing for easy liquidity to ease the credit crisis. The global flows however, determine the short term level of the domestic market. The long term level is a function of the fundamentals. India is however, expected to be a beneficiary of the US recession (if it happens) as those companies will be looking to cut costs to reduce losses.

Ques6: You are launching Focused Equity Fund. Kindly throw some light on your Investment process and fund specific strategy.

Reply: ICICI Prudential Focused Equity Fund will primarily invest into Large Cap companies. For an AUM of Rs.1000 crores it will invest in about 20 stocks. If the collection size increases it is intended that 80% of the portfolio will be invested in 20 stocks. The fund will have sector weightage benchmarked to the Nifty in the range of +/- 5%. The portfolio is intended to be picked up from top 100 stocks in terms of markets cap, listed on the NSE.

Ques7:Why is it that you are going to invest in only 20 stocks and why only large caps.

Reply: To the core of sound investing lies the need for balancing risk and return. The most scientific and commonly used approach to balance risk and return is diversification. The higher the diversification, the lower the risk and moderate the return, and vice a versa. However beyond a point, diversification does not help reduce the risk effectively while continuing to hurt the returns. According to Edwin J. Elton and Martin J. Gruber’s book “Modern Portfolio Theory and Investment Analysis”, the point of balance is at 20, i.e., a portfolio of stocks focused on 20 stocks is optimal in reducing risk while retaining return potential of a portfolio. The fund believes a 20 stock portfolio is ideal to diversify away risk. As Warren Buffet put it “Wide diversification is only required when investors do not understand what they are doing”. The Fund will look at investing in companies in the large cap space. Large caps have an inherent attribute of resilience to short-term turbulence in the markets. These are less volatile as compare to small and mid cap stocks. Large caps also show the general direction of the economy in a much broader sense. Large caps make perfect sense for a focused portfolio, as the fund takes large exposure to certain stocks and liquidity is very important to avoid a high impact cost at the time of buying or selling. Large caps are generally characterized by the following:

  • Reflects broad economic direction
  • Higher Liquidity due to (typically) broader investor and higher institutional participation
  • Relatively lower volatility compared to their smaller counterpart
  • Since large companies are well researched, they are less prone to misinformation shock
  • Large caps are more resilient as they recover faster than small and mid cap stocks

    Ques8: What will be the basis of selection of stocks.

    Reply: The fund will follow the bottom-up approach to identify stocks available at bargain price. This will involve intensive company visits and research to arrive at an intrinsic value of the company and identifying and investing in stocks with promising potential for long-term growth.

    Ques9: what will be the top-10 holdings in FOCUS Equity and why?

    Reply: The fund seeks to buy stocks of companies that it believes are

  • Leaders in the industry in which they operate
  •  Have rapid growth potential over the next 3 to 5 years
  •  Have superior proven management

    The fund intends to generate Alpha from being over weight on certain high conviction picks The portfolio could take exposure to any particular theme and has the flexibility to choose between stocks across themes / sectors / investment styles. The fund could buy RPL V/s BPCL/HPCL; CAIRN V/s ONGC and ITC V/s HLL.

    Nilesh shah
    CIO, ICICI Prudential Mutual Fund
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