The dynamics in equity markets constantly go through series of change and is thus a challenging task to predict its movement and superiority over other asset class. Aggressive hybrid fund offer a solution to this problem as they aim to benefit from the mix of equity and debt. While equities have the potential to offer capital appreciation, the allocation to debt could offer the much needed stability to investors.

ICICI Prudential Equity & Debt Fund (erstwhile ICICI Prudential Balanced Fund) is one such aggressive hybrid fund that aims to maximise wealth at a relatively lower risk.

Launched in November 1999, the fund has a track record of almost two decades and is one of the largest funds in the category.

Mr Sankaran Naren and Mr Atul Patel manage the equity portion of the scheme, while Mr Manish Banthia manages the debt portion.

Investment objective: IPEDF aims to generate long term capital appreciation and current income from a portfolio that is invested in equity and equity related securities as well as in fixed income securities.

Graph 1: Growth of Rs 10,000, If Invested In IPEDF 5 Years Ago

Data as on September 24, 2019
(Source: ACE MF)

Had you invested Rs 10,000 in IPEDF five years back on September 24, 2014, it would have grown to Rs 16,818 as on September 24, 2019. This translates into compounded annualised growth rate of 10.96%. In comparison, a simultaneous investment of Rs 10,000 in its benchmark CRISIL Hybrid 35+65 Aggressive Index would now be worth Rs 15,898 (a CAGR of 9.71%). As can be seen in the chart alongside, the fund has generated significant lead over the benchmark in the last five years.

Graph 2: IPEDF Year-on-Year Performance

*YTD as on September 24, 2019
(Source: ACE MF)

The year-on-year performance comparison of IPEDF vis-à-vis its benchmark CRISIL Hybrid 35+65 Aggressive Index shows that the fund outpaced the benchmark in 5 out of last 8 calendar years. It outperformed the benchmark from CY 2011-2014 and CY 2016-2017. The fund performed poorly in CY 2018 and generated negative return even as the benchmark generated positive returns. In the current year too the fund’s performance is seen lagging the benchmark.

Table 1: IPEDF Performance vis-a-vis category peers

Scheme Name	Corpus (Cr.)	1-year (%)	2-year (%)	3-year (%)	5-year (%)	Std Dev	Sharpe
Principal Hybrid Equity Fund	1,559	0.22	10.89	14.95	14.91	10.38	0.05
Mirae Asset Hybrid – Equity Fund	2,429	6.30	11.47	14.46	NA	9.61	0.11
ICICI Pru Equity & Debt Fund	23,288	2.87	8.61	13.18	15.41	9.57	0.03
Sundaram Equity Hybrid Fund	1,722	5.26	9.95	12.45	11.02	8.64	0.05
HDFC Hybrid Equity Fund	20,696	1.89	8.22	12.21	15.57	9.28	0.05
Canara Rob Equity Hybrid Fund	2,341	4.81	9.68	12.18	14.91	9.03	0.04
SBI Equity Hybrid Fund	29,354	4.33	10.25	11.54	15.26	9.34	0.06
DSP Equity & Bond Fund	5,929	0.72	6.76	10.99	14.76	11.37	0.01
Reliance Equity Hybrid Fund	9,250	-2.98	6.65	10.39	14.22	11.39	-0.04
Kotak Equity Hybrid Fund	1,402	-0.31	5.37	10.12	NA	10.44	-0.02
L&T Hybrid Equity Fund	8,219	-1.66	6.28	9.96	14.70	10.01	-0.02
Aditya Birla SL Equity Hybrid '95 Fund	11,477	-1.87	5.47	9.90	14.11	9.83	-0.06
Franklin India Equity Hybrid Fund	1,812	2.12	7.09	9.58	14.39	8.46	-0.04
Baroda Hybrid Equity Fund	548	-3.03	5.67	9.45	10.86	10.79	-0.06
UTI Hybrid Equity Fund	4,913	-2.55	5.17	9.45	11.13	9.78	-0.07
Edelweiss Aggressive Hybrid Fund	6	2.64	8.08	9.16	11.90	9.93	-0.01
Shriram Hybrid Equity Fund	57	2.72	7.60	9.10	9.45	9.24	-0.04
Quant Absolute Fund	2	2.55	7.43	8.93	13.32	10.91	-0.03
LIC MF Equity Hybrid Fund	356	3.30	6.21	8.70	8.78	10.58	-0.01
Tata Hybrid Equity Fund	4,219	1.43	5.56	8.15	13.39	9.62	-0.07
CRISIL Hybrid 35+65 – Aggressive Index		4.36	8.95	11.23	11.79	8.31	0.03

Returns are on a rolling basis and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on September 24, 2019
(Source: ACE MF)*

Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

IPEDF outperformed the average category peers across rolling periods. The fund lagged the benchmark on 1-year and 2-year rolling period. However, it managed to outpace the index in the 3-year and 5-year rolling period.

In fact, it stood among the top category performers on a 3-year and 5-year rolling period basis. Principal Hybrid Equity Fund, Mirae Asset Hybrid – Equity Fund, HDFC Hybrid Equity Fund and SBI Equity Hybrid Fund were the other top performers during the period.

In terms of risk-return parameters, the fund undertook lower risk as compared to average category peers but higher risk as compared to benchmark. But it could not manage to deliver better risk adjusted returns than the index.

Investment strategy of IPEDF

Classified under aggressive hybrid funds, IPEDF is mandated to invest 65-80% of its assets in equity and equity related instruments and the balance in debt and money market instruments.

The fund looks to identify stocks with long term growth prospects available at modest relative valuations. Price-to-earnings ratios, dividend income potential, and earnings power is taken as financial measure for this purpose.

It adopts bottom up approach to seek companies with above-average profitability supported by sustainable competitive advantages along with top down approach to select companies from various industries. Given the risk associated with mid and small cap segment, the fund takes smaller exposure in the segment.

For the debt part of the holdings, the fund looks to identify securities which offer superior levels of yield at lower levels of risks. In addition, it takes into consideration macro-economic conditions, including the political, economic environment and factors affecting liquidity and interest rates.

Graph 3: IPEDF Portfolio Allocation And Market Capitalisation Trend

Holding (in %) as on August 31, 2019
(Source: ACE MF)

IPEDF has the flexibility to invest its equity portion across market capitalisation. It invests around 70% of its assets in equities. The fund has a large cap bias with around 55-60% invested in the segment. Balance equity allocation is in mid caps in the range of 4-6% and small caps in the range of 2-4%. In the last one year there has been a marginal rise in allocation towards mid and small cap segment. The fund’s allocation in debt instruments is usually around 20-25% predominantly in corporate debt. The rest of holding is maintained in the form of cash.

Graph 4: IPEDF Top Portfolio Holdings

Holding (in %) as on August 31, 2019
(Source: ACE MF)

IPEDF held a sizeable portfolio of 90 stocks as on August 31, 2019. The top 10 stocks are diversified across sectors and constitute 42.4% of the total holdings. ICICI Bank is the top holding in the portfolio with an allocation of 7.6%, followed by NTPC (6.2%) and Bharti Airtel (5.8%). Rest of the stocks in the top 10 holding have an allocation in the range of 2.5-4% each.

In terms of sector wise holding, the fund has the highest exposure to the banking sector at 14.3%. Power (7.7%), Telecom Services (6%), Consumer Non Durables (5.1%) and Pharmaceuticals (5.1%) follow closely behind. Oil & Gas, Finance, Mining & Metals and Petroleum Products are the other prominent sectors in the fund’s portfolio.

IPEDF’s debt portfolio mainly constitutes investment in corporate debts. The fund has allocation of 23.8% in corporate debt with majority of it invested in instruments of banking & finance companies. Having an average maturity of 2.48 years and modified duration of 1.89 years, the yield-to-maturity of the debt portfolio is at 8.58%.

Top Contributors

Among the stocks in the portfolio, ICICI Bank contributed the most to gains of the portfolio in the last one year with a weighted return of 1%. Infosys, Asian Paints, HCL Technologies, SBI Life Insurance and HDFC Bank were the other top contributors to the portfolio gains.

The stocks that eroded portfolio gains the most were ONGC, Vedanta, ITC, Hindalco Industries, NTPC and Sun Pharmaceuticals. These stocks are part of the fund’s top holdings.

Suitability of IPEDF

IPEDF’s equity portfolio is well diversified across market capitalisation and sectors which can translate into returns partially in line with the broader markets. The fund’s debt portfolio has investment in moderate to high quality corporate debt.

The mixed allocation of equity and debt in the portfolio acts as a cushion against market volatility and enables decent returns across market phases and cycles. It is suitable for moderately high risk takers with investment horizon of 5 years or more.

The fund has performed well across period, especially during longer time frames. However, its risk-adjusted returns could be improved, if the fund managers manage to enhance the returns while controlling the overall risk.

Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

This article first appeared on PersonalFN here.