ICICI Prudential Asset Management

About

ICICI Prudential Asset Management Company Limited (‘the Company’) was incorporated on June 22, 1993. The principal shareholders of the Company are ICICI Bank Limited (51%) and Prudential Corporation Holdings Limited (49%).

In the year 2000, ICICI Prudential AMC Started offering Portfolio Management Services. In the year 2007, ICICI Prudential AMC starting the Real Estate Investment Series Portfolio.

Key details from financial statements for FY 21-22 –

YearTotal Income (INR crores)Total Expense (INR crores)EBIT (INR crores)EBIT MarginNet Profit (INR crores)Total Income (USD millions)Total Expense (USD millions)Net Profit (USD millions)
2021-222,634.07706.261,927.8173%1,927.81351.2194.17257.04

As on 30th April 2022 its aum stands at Rs 4,94,072.24 crore i.e. (~ $ 63.34 billion @78INR per USD) which is spread across more than 68 funds in all asset classes.

Key staff

  • Nimesh Shah is the MD & CEO at ICICI Prudential AMC since 2007. Prior to joining, he was senior general manager at ICICI Bank where he handled many responsibilities including project finance, corporate banking, and international banking. He is a chartered accountant by qualification and has more than 28 years of experience in the banking and financial services industry.
  • Sankaran Naren– CIO – Sankaran Naren – Executive Director & Chief Investment officer, oversees the entire investment function across the Mutual Fund and International Advisory Business, He has an experience of 31 years in almost all spectrum of the finance service industry from investment banking, Fund management, equity research and stock broking operation, His qualification include B.Tech from IIT Chennai and MBA (finance) from IIM Kolkata. https://www.linkedin.com/in/sankaran-naren-6003678/
  • Rahul Goswami – Chief Investment officer, Fixed Income. He currently manages 8 debt funds in the company. He has an overall experience of 24 years and has worked previously with Standard Chartered Bank, Franklin Templeton, UTI bank etc. His qualification include a degree in science and an MBA from Bhopal University. 

Investment Philosophy (for firm)

The website of the AMC does not have any explicitly mentioned Investment framework.


The investment process of the AMC is to provide long term performance based on strength of the fundamentals, process driven investment approach with enough flexibility for the fund manager to manage their funds in their respective unique style and insights.

Media

Prioritizing asset allocation led to positive investment experience: S Naren, CIO, ICICI Pru MF dated 4th May 2022.

https://economictimes.indiatimes.com/mf/analysis/prioritizing-asset-allocation-led-to-positive-investment-experience-s-naren-cio-icici-pru-mf/articleshow/91304906.cms

An excerpt from the interview where he talks about his contrarian style of investing.“What, according to you, led to being a Contrarian?
Managing other people’s money taught us that money will come in at a time when investors want to invest and most often this happens in an up-trending market. When you are a contrarian and invest in a counter cyclical manner, you invest in asset classes which are cheaper irrespective of the time you get the money. The advantage is equity, debt, gold all peak and bottom-out at different points of time. As a result, we popularised multi asset investing. Here, an investor gets the benefit of counter cyclical investing which over the long term works well for the investors. So, in 2007 and 2017 when infrastructure and small caps were overvalued and inflows surged, being counter cyclical would have helped and having a multi asset approach aided in delivering a better risk adjusted investment experience.”

Sankaran Naren shares his learnings from 2020 | Morningstar India

https://www.youtube.com/watch?v=lrgRpicbUSo

Q. what worked in the investment process in the 2020 market cycle?

As 2020 represented an end of a cycle there were periods of time in the last 5 years where one could have taken extra credit risk thereby getting extra returns but one could have gotten away by taken extra credit risk because not many actual risk played out, but in 2020 all or most of the down side risk played out and the ICICI AMC had taken caution bets in 2017 and 2018 but it actually helped the AMC outperform in 2020 and not in earlier period.

Q. Playing through the cycle strategy worked well for ICICI AMC?

As during the cycle the AMC was very confident that there was foreseeing a rate-cutting cycle, so when debt gave good returns in 2020, the AMC was very pleased because it was a part of playing through the cycle strategy, in which the AMC had a good team.

Q. The call of the last quarter of 2020?

Since the AMC had decided to play a cautious call on duration management in the debt schemes and expected a fall in interest rates which eventually played out. The AMC wanted to reduce the duration in many of the products since it was very obivious for a global stand point that bond yield hikes in the world would increase which was the case with brazil and turkey in the last year

Q. Any learnings in 2020 to imbibe in the investment process?

In some scheme there was no sufficient liquid funds since there were peers struck by credit risk the AMC would have been in a better position if few funds had sufficient liquid debt holdings in their portfolio, but that has been corrected by a regulation which requires schemes to have a specific portion invested in liquid debt.

Q. How should investor approaching asset allocation or constructing portfolios?

The investor have to remember that past debt returns are not an indicator of future returns and the likely returns from many mutual funds are very different from the past returns of debt MF. The Task the AMC took up in the last year was to shift retail investor focus from long term debt funds to asset allocation funds (like dynamic Mutual fund) where they get a mixture of equity and debt, while the debt cycle has ended on the duration side and the equity was having a stronger period. Rather than settling for lower returns in debt the retail investor can choose the dynamic MF because the Fund manager tries to have an optimum balance between debt and equity to achieve sustainable returns. 

ETMGS 2019: ICICI Pru AMC’s S Naren on wealth creation through right asset allocation

https://www.youtube.com/watch?v=90Gm3Kl3QdY

Q. what is asset allocation?

Taking money from an asset class which has done well and deploying it into another asset class which is doing badly. It is one of the toughest jobs in the investment eg. In 2007 the asset class which was doing well was equity and the asset class which was doing badly was gold it was very tough for ICICI AMC to convince their clients to sell equity and deploy it in gold or debt.

Q. why does asset allocation work?

It works primarily because different asset classes go through different cycles. There are four asset classes broadly, Equity, Gold, Real estate and Fixed income or debt. Each asset class has its own cycles. I have never seen a cycle where all four assets do very well. For eg. Gold is an asset class which tends to do well when you have a very bad news it is an asset class which functions inverse to all the other asset classes. So asset allocation will always work since all the asset classes will continue to be volatile and which gives investor an opportunity to make money.

Q. when will the cycles end?

Since none of the asset classes have boom together, if in the 4th year if any asset classes are continuing to do well and if the investor has the ability to come out of the asset class at year 4 and redeploy the money in another asset, he would have made significant amount of money. For eg., in 2018 the ICICI AMC had invested 1000 crs in gold and investors had questioned the rationale for investing in gold we at the AMC had told between 2012 and 2018 Gold had underperformed and we were practicing asset allocation by investing in gold and made 25% returns on that asset class.

Q. why do you think there are cycles?

Cycles exist because there are points of maximum greed (where risk is highest) and maximum fear ( where potential is highest), if there is any big global negative event like bombing of World Trade centre, 2008 Global Financial crises, if they had purchased equity after these events the investor always made money.

In reality when investor sees the fear they don’t see the potential they freeze and when they see greed they actually run into investment. Since you can’t control greed and fear the investor will always make money in the wrong time.

Q. How a retail investor can control greed and fear?

The retail investor can do SIP’s. Effectively the investor does averaging and will end up doing asset allocation. In the MF industry there are also categories like Dynamic asset allocation, balanced advantage which sell in the way up and buy when the markets go down. Since volatility is guaranteed the fund is structured in a way to sell in the way up and buy when the markets go down it will give good opportunities to the investors.

Interview with S Naren – extract from book ‘Brightest Investment Minds’ by Anuj Shah

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A B C D E – S. Naren’s 5-point investment philosophy and views on the NFO Media platform name: Youtube channel of ICICI Prudential mutual fund. Date: 31st Dec 2018

https://www.youtube.com/watch?v=X0AqXmF0JQ8

A- Asset allocation – It is very easy on paper but very difficult in practice.

B- To avoid a bubble and buy in a bust.

C- Identification of cycles. One end of the pendulum is extreme fear and the other end has extreme greed.

D- Debt – Most important asset class in one’s portfolio. Debt provides stability and comfort.

E- Equity

Nimesh Shah on why ICICI Pru AMC is a buyer in this market rout Media platform name: ET Date: 12th March 2020

https://economictimes.indiatimes.com/markets/expert-view/nimesh-shah-on-why-icici-pru-amc-is-a-buyer-in-this-market-rout/articleshow/74591768.cms

If you are hungry, you have two choices — you can eat pizza for instant gratification or quick gains or you can cook your dal makhni which will be pain first and gratification later. Is it time to start cooking the dal makhni or right now you can also eat a pizza?

I do not know the recipe for a pizza. We know only the recipe of dal makhni. So that is the only option. There is no other option. ICICI Prudential Mutual Fund has been buying consistently because our models are such that we start buying. Though we are buying, we do not know whether we are going to make money in the near term. But we believe at these valuations, we will make money over a three-year period. That is what I am repeating. There is no option but dal makhni.

Shah of ICICI Pru says ‘For investors, safety must be paramount, followed by returns’ Media platform name: The Hindu Date: 8th Dec 2018

https://www.thehindubusinessline.com/portfolio/mutual-funds/nimesh-shah-of-icici-pru-says-for-investors-safety-must-be-paramount-followed-by-returns/article30237086.ece#

Over the past two years, many debt mutual funds have been in a sticky spot, due to their exposure to certain NBFCs and corporates that have defaulted on debt repayments. Retail investors have been hit hard, with the slew of defaults and downgrades not appearing to ease anytime soon. Nimesh Shah, MD and CEO of ICICI Prudential Asset Management Company, believes that by not chasing higher yields and following an independent assessment of credit, ICICI Prudential has managed to ride out the volatility well and contain risk in recent times. He believes that for investors in debt funds, safety must be paramount, followed by liquidity, then returns.

MMI Interview with Naren-CIO, 2014

https://anchor.fm/moneymanagersinindia/episodes/ICICI-Prudential—S-Naren-efutmg

What is the CIO philosophy of the market and therefore the firm philosophy?

The Firm believes a lot in behavioral finance and The company has a research process that is stable and they are not a boutique AMC so they don’t believe in having one investment style within the firm and in different phases of the market different styles work so the Firm has to build a different investment style products with a robust investment process. The firm has different products with its own investment process and each product has boundaries on what it can achieve. So the Fund managers are selected based on the fund’s process and the boundaries along with his core competence.

How does the Firm manage to link a Fund with a Fund manager’s core competence?

The Firm had stopped external hiring from 2010 and the growth within the Firm’s hierarchy shows a person’s core competence and in this process the Fund manager’s core competence is aligned with the Fund   

What is the Fund’s competitive advantage in the research process and where does the CIO think the research process adds value?

The advantage is that the stock universe the Firm has is necessarily ahead of the stock universe of sell side. For eg. NATCO pharma when ICICI AMC bought the stock there was no sell side coverage for the stock and it was not researched stock by the sell side, The way the Firm started coverage of Natco pharma was that they met Dr.Reddy’s Lab and asked the reason for their tie up with NATCO pharma they said that NATCO pharma have unique strengths, which led to a start of research on NATCO pharma 

How many stocks has ICICI AMC have started their research ahead of the sell side currently?

The CIO had said currently they have around 50 stocks which is not researched by the sell side. The firm has around a stock universe of 250-300 stocks and the sell side research comprised a stock universe of around 200 stocks.

How different ICICI AMC research is from the sell side research?

The source of difference the Firm have more value biased research and we are looking at sectors that people have already given up faith in, as compared to the research done by the sell side by keeping the foreign investors in mind who have much more growth biased research

How do you define value?

We define it broadly in some cases it can be price to earnings and price to Book, market cap to sales in some cases like in a special situation where there is a certain problem which has happened in that industry which the firm believes is not sustained over a long period of time. In some cases where the company has good and sustainable competitive advantage

In idea generation and stock research where is the competitive advantage for ICICI AMC?

The primary advantage is the fact that the Firm can manage a big team, and the ability to raise money when required which leads to a situation to look for new ideas to deploy the freshly raised money

How do you measure success?

We are comparing internally with a benchmark to outperform a benchmark by a margin. The margin is of 3.5% for a small fund post fees against the price index not total return index, large cap funds the margin on a 3 year basis is more than 3%.

What is your sources of value added in the fund?

The common research process, internal home created fund managers, review process which is put in place on the fund, it is equally all three have contributed to the value added in the long run. And the fact that there is no change in strategy after a failure 

2020 summary by another analyst

Behavioral finance:

We believe a lot in behavioral finance. Essentially that has been part of our style post 2007. Post 2009 we understood what behavioral finance is. Theoretically we were weaker on what is behavioral finance in 2007. 

Research process:

We ideally want to cover stocks whose market cap is 500 crores or where there is a free float of 300 crores. Periodically what we do is we run through all companies above 500 crores, and see whether there is anything in that list that makes sense.

I personally don’t believe that detailed models should be kept where the sell side has good coverage. But for companies where there is no sell side analysis we make an average-decent model. 

As a firm we have a fair amount of value assets in this country. We have got a lot of money which is more oriented to value stocks. The sell side basically covers keeping foreigners in mind who have a growth bias. Very often, value bias forces us to look at some stocks, whereas the growth bias forces the sell side to look at some stocks. In the last five years discovery has become much bigger. We have raised 1300 crores. So that has resulted in the expansion of coverage that doesn’t meet what the sell side does. 

Macros:

The way I see it is in most entities, the equities person looks much more in companies and says don’t look at macro for eg Warren Buffet. But after 2008, it is very clear that macro works, and has a major impact. I feel we are the people who have spent a lot of time and energy on it. However after September we are trying to de-emphasize macro. Macro you look at when something is negative. We found that when macro is positive we were still doing macro oriented discussions. Macro should be looked at when macro is the problem. We would not want all analysts to do macro. In a positive macro people need to look at more bottom and  look at things more constructively in an economic sense. 

MMI Interview with Nimesh Shah- CEO

CIO is completely top down while the rest of the company is bottom-up. So it’s a good blend of top down and bottom-up. 

Along with risk, ceo is involved in product design. For example a focused blue chip is designed such that the probability of beating the benchmark is because we don’t allow the fund manager to make sector calls. My role comes in deciding what we cannot do, in designing the product. Even when there is a difference of opinion between the fund manager and CIO, the fund manager can do what they believe in provided they can justify to the CIO.

Focus on value is a differentiator – no one is focusing on value.  We have started advertising our styles. 

Having different styles within the same fund house is a differentiator.

Since we look at 3 year performance, we give comfort to our fund managers that we don’t change strategy after short term underperformance; so we have the ability to take a contra call and stick to it; we are able to do this because we have products to take care of the business.

Analyst questions

  1. Was there a clearly-articulated investment philosophy at inception and how has it been evolved?
  2. What is the investment process for the AMC and how does the process work in practice?
  3. How research is performed, what are the key drivers, and how is it different to competitors?
  4. Is the research effort logically consistent with the stated investment process?
  5. How is portfolio construction done and what is the competitive advantage in the process?
  6. How does behavioural finance fit into your investment process and how does it impact your investment decisions
  7. On execution, does the AMC have any competitive advantage compared to peers?
  8. What is the sources of capabilities compared to peers to add value to funds?
  9. How is credit assessment of debt securities performed?
  10. Is there any target of funds to be introduced in the market during a cycle of 5 years or is it based on requirement?
  11. What is a capacity AUM after which any fund will underperform?

Prepared by – Partha, May 2021

Peer reviewed by – Date

2020 analysis

What is the investment philosophy of ICICI and how has it evolved?

In which scenarios do you think your investment philosophy underperform?

What are the valuation tools that you use to make an investment decision?

How does behavioral finance fit into your investment process and how does it impact your investment decisions? 

In one of your interviews you said ICICI does independent credit assessment of debt instruments, can you give us an insight about the credit assessment process?  

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