ICICI Prudential Emerging Star demands patience

Emerging markets give rise to emerging companies and this gives fresh investment ideas to mutual funds that are always on the lookout for the next More Pictures
big multibagger. ICICI Prudential Emerging Star was launched with a similar intention in late 2004 and its investment strategy was to build up a portfolio of mid and small cap stocks which it believed had the potential to turn out to be future stars.

The idea was simple, catch them young when they are available at low valuations and then let them evolve into industry leaders. But has the strategy really paid off? Here is the reality check.

PERFORMANCE: After an impressive performance in the first year and a half, it turned into an average show in the following years and then the market meltdown led to a sharp fall in the value of most of the stocks in its portfolio. The year 2008 saw the fund's net asset value tumble by nearly 69% against the 64% drop in its benchmark CNX Nifty Junior.

While the returns were negative, its assets under management (AUM) also began to shrink at a rapid pace. Thanks to the diminishing valuations in the mid and small cap space, the fund was left with just a little over Rs 250 crore of assets by the end of 2008 as against over Rs 1,000 crore in 2007. The fund currently manages about Rs 400 crore.

But the scheme has made a noteworthy comeback this year. Since January, the fund has provided 88% returns to its shareholders outsmarting the Sensex and the Nifty that yielded returns of about 77% and 71% respectively. It however continues to trail the CNX Nifty Junior, that returned 120% during this period.

PORTFOLIO: An extremely high beta fund, Emerging Star clearly has an inclination for extensive diversification. It holds an average of 50 stocks in its portfolio at any point of time. An interesting feature about the fund's investment strategy, however, is its ability to hook on to its selections for a fairly long time.

Most of the stocks that the fund currently holds have been in its portfolio for over a year now and in some cases for over two years. It was probably for this very reason that the fund failed to perform in 2008, committed as it was to holding on to its investments irrespective of market conditions. Sharply criticised then, it is however this commitment and patience that has started to pay off - as reflected by its returns this year - though it is still to beat its benchmark!

Some of the stocks that it has been holding for over a year now include Lupin, TRF, Bajaj Auto, Marico and Kalpataru Power Transmission and most of these have doubled in price since the fund invested in them first. On the other hand some of its fairly long-term investments like United Phosphorus and Phillips Carbon Black are yet to deliver decent returns. At the same time, the fund has also missed out on some of the high growth investments like Axis bank and PNB, which it exited in Feb '09 and May '09 respectively after having acquired them in 2008. It is also surprising to see the fund invest in stocks like Shree Cement in Sep '09 after it had seen a good run up this year.

As far as the sectoral composition is concerned, while industrial manufacturing and financial services currently dominate the portfolio, the fund has also begun to build up on automobiles. The auto sector is fast gaining the interest of many fund mangers across the industry. Having said that, however, the absence of Hero Honda from the fund's portfolio is equally surprising.

OUR VIEW: One needs to have a lot of patience to earn money from this fund. While it can generate good returns in a bull run, be prepared to get hit when the markets move in reverse gear. While the fund has shown a marked improvement in its performance this year, there is still scope for lot more. Those ready to take on some risk and a willing endurance to stay put for long should consider investment in this fund.