ICICI Prudential MidCap Fund Payout Inc Dist cum Cap Wdrl INF109K01EH6

The following text is from April 17, 2023:

Lalit Kumar classifies his universe into four buckets: counter cyclical, growth/compounders, special situation, and avoidable. Within these, the portfolio is biased towards the counter cyclical names, followed by allocation to growth/compounders. The allocation to special situation names is tactical in nature and is a negligible position in the portfolio.

Kumar begins with a top-down view on sectors based on the marco view. Once he identifies where a sector is placed in his business cycle framework, he decides on the weight to that sector. Sectors that are a part of the counter cyclical bucket (bottom cycle and midcycle) will generally be overweight. Similarly, sectors at the peak of the cycle in the framework will be underweight.

Kumar lays a lot of emphases on how the valuation is determined for each sector and to names within that sector. He looks at metrics beyond the usual known ones like PE, PB, EPS, and so on during his evaluation. For each sector, the value metrics used can be different/additional in conjunction with the usual metrics. Also, the range used to determine the fair value would depend on where the sector is placed in his business cycle framework.

While he doesn’t ape the benchmark, active weights that have a significant deviation from the benchmark are regularly monitored by the team. During his analysis, if Kumar finds that the moat of the company he holds is breaking/broken, he will not hesitate to exit his holdings swiftly. Taking active cash calls will not be a part of the strategy.

We would like to hold on to our conviction as of now and evaluate how the strategy progresses and evolves over time. Also, we would like to evaluate how Kumar is able to manage this fund along with his other strategies. The fund earns an Average Process Pillar rating.

Lalit Kumar brings his own style of investing to this fund. He relies on the investment framework that he has built to help him create a well-diversified portfolio of 60-70 names across sectors.

Within his framework, Kumar tries to largely build positions into sectors and names within sectors that are beaten down or against the street’s view. Having significant position in these names ensures that there is a margin of safety already built in. The objective is to be early in the cycle and be patient with the positions until the cycle plays out. Lalit builds these positions with a two- to three-year timeframe, which in his opinion is typically when the entire approach would yield positive results.

Kumar is cognizant that the time required for the counter cyclical names to reap rewards can be relatively long and therefore could result in significant underperformance until the tide turns in their favour. To offset this risk, he allocates a portion of the portfolio to growth/compounders even if their valuation is high, as long as they meet his broad framework. Here, Kumar focuses on sectors that have a high target addressable market, companies having a strong moat that can maintain or increase ROCE (beyond 15%), and good quality managements that are great at execution and gaining market share.

Allocation to the special situations bucket is short-term in nature and done as a tactical allocation. While evaluating companies, Kumar keeps a sharp eye on any potential red flags like ROCE falling below cost of capital, capital misallocation, uncertainty regarding regulation, and so on. If any of these red flags are triggered, the company would fall in the avoidable bucket.