Flexicap Fund is an interesting proposition for long-term investors: Rajat Chandak
Among the different categories of equity UCITS, flexicap is the most flexible, allowing the corpus to be deployed on large, medium and small caps according to the relative attractiveness of these individual pockets. Exposure to large caps offers a defense in times of turbulence, while mid and small caps help generate better long-term returns. The balance between risk and reward makes it a very reasonable investment avenue for investing in stocks, says Rajat Chandak, Senior Fund Manager, ICICI Prudential AMC.
In an exclusive interview with Sanjeev Sinha from FE Online, Chandak shares his take on the stock markets and their new Flexicap fund. Extracts:
Indian stock markets have largely resisted so far. Do you see this trend continuing?
Indian markets in line with global markets have been supported by liquidity released by global central banks. This, along with almost zero cost of capital in most parts of the world, has played an important role in ensuring the resilience of stock markets. From a business cycle perspective, Indian markets remain attractive as companies have deleveraged, the investment cycle has yet to pick up and credit growth and earnings-to-GDP ratio are weak. So, compared to the global business cycle, the risk of business cycle contraction in India is very low. However, stock valuation is no longer cheap as it was in March 2020.
ICICI Prudential launched the ICICI Prudential Flexicap Fund. Why do you think this category is relevant in today’s market environment?
Among the different categories of equity UCITS, flexicap is the most flexible, allowing the corpus to be deployed on large, medium and small caps according to the relative attractiveness of these individual pockets. Exposure to large caps offers a defense during times of turbulence, while mid and small caps help generate better long-term returns. The balance between risk and reward makes it a very reasonable investment avenue for investing in stocks. Given this framework, we believe that flexicap is an attractive proposition for a long-term investor.
How is IPRU Flexicap different from other funds in this category?
The differentiator in the case of the ICICI Prudential Flexicap Fund is the model-based approach to deciding the allocation to different market capitalizations. The program will be based on an internal market capitalization model and other economic indicators. This model will also be used for portfolio rebalancing.
This model includes parameters such as the market capitalization weight as a percentage of total market capitalization, the valuation differential of mid and small caps versus large caps, and the relative strength index (RSI). The RSI assesses whether the particular market cap is in an overbought or oversold zone. The fund manager would look in more detail at the business cycle or macroeconomic indicators to refine the allocation of the model.
If the market remains high, what would this fund’s portfolio look like?
While the market valuation is rich, the outlook for earnings growth remains positive. The deployment phase will be gradual in nature and, more importantly, will be done wisely by selecting sectors and stocks where we see opportunities for reasonable risk-adjusted return in the medium to long term.
What are some of the main risks that can derail the current rally?
Rising inflation is one of the risk factors to consider. Historically, while manageable inflation tends to be positive for equities (supports nominal GDP and earnings growth), it could also lead to higher interest rates which could derail the pace of economic recovery. Right now, most of the world’s central banks seem to be adjusting to higher inflation levels. The other significant risk is how the pandemic is likely to unfold. Since a significant portion of the population is susceptible to vaccination, the potential for disruption appears to be mitigated.
In which sectors are you overweight or underweight?
We believe there is potential in various industries, on a bottom-up basis, to generate good earnings growth. We see opportunities particularly in large private banking, automotive, retail, construction and telecommunications spaces.
When it comes to expensive sectors, FMCGs (consumer staples) are one of them. Technology is another pocket that has undergone a revaluation over the past 15 months.