ICICI Prudential Discovery Fund Diversification in investment styles can bring significant advantages over the long run

in equity markets. It's one thing to make returns on investments in the companies that are doing well today, but something else when you employ the potential of companies that might do better tomorrow. ICICI Prudential Discovery Fund does just that. By exploiting the valuation gap with the potential to unlock value over the long term, it focuses on discovering stocks that have high pot ential, but are currently lying low at a discount to their inherent value. This open-ended diversified equity fund, invests in companies that are well managed, fundamentally strong, and chosen based on in-depth research. As it is intended to buy these companies at a discount to their fair value, there is also a margin of safety in the value of the portfolio.
Investment Philosophy This fund adopts a "Bottom-up" strategy, to identify and pick its investments based on an evaluation of several parameters such as Price / Earning, Price / Book Value and Dividend Yield. It aims to acquire stocks that are selling at discounted prices to t heir inherent value and is unperturbed by the overall trend in the market. The portfolio works towards being well diversified across sectors to try and reduce risk. Key Benefits y It seeks to provide a relatively stable return over the long term by aiming to discover stocks at a discount to their fair value. y It diversifies your existing equity portfolio; an investor, who diversifies across growth and value portfolios, can aim to reduce volatility of returns.

Objective: ICICI Prudential Discovery Fund seeks to generate returns through a combination of dividend income and capital appreciation by investing primarily in a well-diversified portfolio of value stocks. Value stocks are those, which have attractive valuations in relation to earnings or book value or current and/or future dividends.

Key Features Type: Open-ended Equity Fund Options: Growth and Dividend Options Default Option: Dividend Reinvestment Initial Investment: Rs.5000/Minimum Additional Investment: Rs.500/- and in multiples thereof. Institutional Option: Rs.10000/Structure: Open-ended Equity Fund Inception Date: July 30, 2004 Face Value (Rs/Unit): Rs. 10 Entry Load: Nil. Exit Load: If the amount, sought to be redeemed or switched out, is invested for a period of upto one years 1%; If the amount, sought to be redeemed or switched out, is invested for a period of more than one year from the date of allotment - Nil.

Systematic Investment Plan Monthly: Minimum Rs. 1000 + 5 post-dated cheques for a minimum of Rs. 1000 each. Quarterly: Minimum Rs.5000 + 4 post-dated cheques of Rs. 5000 each. Systematic Withdrawal Plan Minimum of Rs.500/- and Multiples thereof
Strategy The fund, through its process of discovery, seeks to identify stocks whose prices are low relative to their historic levels, book values, earnings and cash flow potential. It exploits valuation gap and tries to unlock value over the long term. The fund focuses on discovering stocks that have high potential but are currently lying low at a discount to their inherent value. Stock selection in this fund focuses on the merits of the specific stock unperturbed by the overall market trends. Since it takes a while to unlock the value from such stocks, investors need conviction and investment discipline to realise these gains. This fund invests in companies that are well managed, fundamentally strong, and chosen based on sound research. As these stocks are bought at a discount to their fair value, there is a margin of safety in the value portfolio.

Analysts View The fund manager scouts for undervalued stocks available at attractive valuations in relation to their PE, BV or current/ future dividend. So its not surprising to see relatively unpopular stocks pack the portfolio. Neither is it surprising to see him move swiftly in and out of sectors wherever he sees value, or the lack of it. The basic investment strategy of this fund is of a value style. However, a mix of investing strategies has been employed in this fund contra, dividend yield, low valuations and special situations. The funds value-investing approach has yielded rich dividends. Its longterm track record is impressive and it has fallen less than the category average in the current market upheaval. The Verdict Though it trounced the competition in 2009 and was a top-quartile performer in 2010, its value-based approach can be a letdown during bull runs. Since it tilts towards a mid- and small-cap portfolio, its downside protection is moderate. Its market cap tilt and value based approach make it mandatory to stay invested for the long term. Portfolio Insight Financial Services, Metals, and Healthcare are the top 3 sectors. The stock choices within arent typical. {Sectoral allocation} Top 10 stocks include some uncommon scrips such as Rain Commodities. There are some offbeat stocks such as FDC, Akzo Nobel India and eClerx Services. The fund focuses on mid caps (35%), small caps (35%) and large caps (30%). The equity exposure is always above 90 per cent.

Expense ratio(%)

1.94

Portfolio Turnover Ratio(%) 61 Last Divdend Declared Minimum Investment (Rs) NA 5000

Sectoral Holdings

Industry Pharma-Ind. BD & Formlns Banks-Pvt Sector Power Generation Telecom-Service Cement-SR Sector Allocation (%) Sector Funds Auto & Auto Ancillaries 6.41 Banks 12.10 Chemicals 1.39 Computers - Hardware 0.63 and Peripherals Construction and 0.27 Infrastructure Construction materials 7.70 Consumer Durables 0.27 Consumer Durables and 1.08 Electronics Current Assets 7.53 Electronics & Electrical 0.51 Equipments Engineering and Capital 0.26 Goods Fertilizers, Pesticides & 6.18 Agrochemicals Food & Food Processing, 0.15 Beverages NBFC 0.59 Non Ferrous metals 6.18 Paper and Natural fibre 2.63 Petroleum, Gas and 5.90 petrochemical products

Percentage 9.72 6.19 6.16 5.73 4.76

Pharmaceuticals & Biotechnology Power Generation Power Transmission Research and Education Shipping Software and Consultancy Services Steel and Ferrous Metal Telecom Services Textiles Tobacco & Pan Masala Tourism and Hospitality Utilities - Gas, Power

10.83 1.25 0.46 0.02 3.93 7.80 4.42 4.24 2.19 0.23 0.85 4.02

Asset Allocations Asset Equity Other Assets Other Equities Total Percentage 90.50 8.42 1.08 100.00

Monthly returns 1 month 3 months 6 months 1 year 00.20 06.24 12.59 61.37 -00.90 01.67 02.72 20.10

Volatility Standard Deviation is a measure of the risk levels that a fund has exposed investors to. With a Standard Deviation of 8.99%, IPDF delivers an average performance vis-a -vis peers. While DSP ML Equity (8.46%) delivers the best performance, Tata Equity P/E (9.20%) languishes on the lowest rung. Risk-adjusted returns: Sharpes Ratio Sharpe Ratio is a measure of the risk-adjusted returns delivered by a fund. IPDF (Sharpe Ratio 0.04%) falters on this parameter and emerges as the worst performer in the peer group. Yet again, DSP ML Equity (0.20%) delivers a good performance and occupies the top position, followed closely by Tata Equity P/E (0.19%).

The above graph bears testimony to IPDFs poor showing as compared to its benchmark index i.e. S&P CNX Nifty. Rs 100 invested in IPDF at inception (August 2004) would have grown to Rs 273.4. Had the same amount been invested in the S&P CNX Nifty, it would have appreciated to Rs 303.5. In a nutshell IPDFs performance on both the risk and returns parameters vis-a -vis its peers leaves a lot to be desired. To further worsen matters, the fund has failed to match its benchmark index since is inception.