ICICI Prudential India opportunities fund: Investing in special situations for better returns

A fund that has performed across the market cycle.

All companies tend to face some form of challenges in their lifecycle. These may be in the form of disruptive competition, government regulations, board or management-related conflict, or even adverse lawsuits. In such ‘special situations,’ even quality firms with otherwise sound fundamentals may witness corrections in their stock prices.

ICICI Prudential India Opportunities successfully diversified its portfolio by buying companies that have corrected or are nearing the bottom of a declining phase due to temporary challenges. This strategy has led to superior returns for investors, as robust companies often weather special situations and challenges, resulting in a sharp rise in their prices.

The fund has successfully navigated local and macro challenges such as COVID-19, lockdowns, high inflation, interest rate hikes, the Russia-Ukraine conflict, crude price surge, and the NBFC crisis. The fund has been among the best thematic funds in the last 3-4 years and across equity categories.

Consistent and spectacular returns

ICICI Prudential India Opportunities has consistently outperformed its benchmark, Nifty 500 TRI, over one, two, three, and four-year timeframes. Over three and four-year periods, the fund delivered 36.3 per cent and 27.1 per cent, respectively, while the benchmark managed 22.7 per cent and 18.1 per cent. This makes the fund one of the best-performing thematic equity funds across all categories, outperforming the Nifty 500 TRI by 9-15 percentage points.

On a rolling 3-year returns basis from the time of the fund’s inception (January 2019) till August 2023, ICICI Prudential India Opportunities has given mean returns of 28 per cent, while the benchmark has given only 13.8 per cent over the same period.

Another important factor is consistency in outperforming the Nifty 500 TRI. From the fund's inception to the present, the scheme has exceeded the benchmark 100 per cent of the time on a rolling 3-year returns basis.

SIP (systematic investment plan) investors would have found the voyage beneficial as well. Three-year SIP investments in the fund would have yielded a solid 30.3 per cent return (XIRR), while a four-year SIP would have yielded an astounding 31.4 per cent return.

As a result, lump-sum and SIP investors have found the product to be quite profitable.

It's also worth noting how the fund's performance stands up in the face of market volatility. In the case of the ICICI Prudential India Opportunities, the upside and downside capture ratios (2020-2023 data; ACE MF), which show a fund's performance in respect to its benchmark during surging and correcting markets, allow for fascinating findings.

The fund has an upside capture ratio of 122.39, which means it climbs much more than the benchmark Nifty 500 TRI during rallies. Its downside capture ratio is 74.08, indicating that during declines, the fund's NAV falls far less than the benchmark. A score of 100 shows that a fund performs as expected.

Smart sector and stock moves

The ICICI Prudential India Opportunities fund invests on unique circumstances. This is similar to the contrarian approach when picking companies and sectors for the portfolio. However, the choices have always been companies with extremely strong fundamentals and a track record of performance that are presently suffering a brief headwind. To capitalise on a potential turnaround, sector and stock exposures might be focused.

Following the March 2020 market meltdown, the fund bought up on power, telecom, and metal companies while they were all out of favour and profited handsomely from the ensuing rise. Similarly, before banks began their comeback in 2021, the fund had significant exposure to the sector.

After the initial COVID-19 boost faded away for the category in late 2021 and early 2022, ICICI Prudential India Opportunities bought up on pharma companies as values got appealing.

The fund has skillfully juggled its holdings based on the specific industry, business, macroeconomic scenario, and other critical aspects to discover potentially profitable trades ahead of time.

Past investments in firms such as Mahindra & Mahindra (despite the auto sector being in a low demand and suffering climate at the time) and Hindalco Industries (despite a worldwide slowdown following the COVID crisis) turned out to be multi-baggers for the fund. When there were company-specific, regulatory, or industry uncertainty, prominent long-term holdings such as Bharti Airtel, NTPC, and Sun Pharmaceuticals were purchased.

ICICI Prudential India Opportunities invests in equities using a flexi cap strategy. It was more large-cap oriented until 2021, with over 70 per cent held in such equities and the rest in mid and small caps. However, during the last year or two, the fund has altered gears and become more multi-cap in its approach. According to its July 2023 factsheet, it has 59.6 per cent exposure to big caps, 16.4 per cent exposure to midcaps, and 13.1 per cent exposure to small caps. As a result, a broad-based special circumstance portfolio with long-term promise becomes feasible.

ICICI Prudential India Opportunities may be an appropriate option for investors with a high-risk tolerance seeking excellent long-term returns. After talking with the financial advisor or mutual fund distributor, investors may consider the fund as a diversifier or as part of their satellite portfolio.

Because the fund invests in unique circumstance stocks, it may experience periods of poor performance. As a result, investing via SIP would be preferable since it would help average out expenses over market cycles.