ICICI Pru closed-end funds: stay or exit?

The year was 2013, when mutual funds began the closed-end launch fiesta and some of them are now 3 years old and ready for redemption. ICICI Prudential Asset Management Co. Ltd has launched 28 closed-end equity funds starting 2013 till date and two of these are ready for closure.

Except, it looks as if the fund is not ready to let you go. ICICI Prudential Value Fund–Series 1 (Value1) and ICICI Prudential Value Fund–Series 2 (Value2) are up for renewal but the fund house wants you to extend both the schemes to 2018; the terms of Value1 and Value2 have been extended to 31 December 2018. Value1’s investors have an option to opt for the rollover on or before 7 November 2016; for Value2’s investors, the last date is 5 December. But should you opt for a roll-over?

The story so far

In 2013, policy making had slowed down, there was the stink of corruption in the air, India’s growth was tottering and markets were grim. But with the hope of a Narendra Modi-led government being elected in 2014 elections, equity markets had started to show signs of revival. Fund houses such as IDFC Asset Management Co. Ltd had sensed an opportunity to launch a closed-end fund as early as April 2013. Others such as ICICI Prudential jumped on to the bandwagon around December 2013 and launched a series of closed-end funds, starting with Value1 and Value2.

Did they deliver? Value1 returned 25.77% since inception, as against 23.89% by its benchmark index S&P BSE 500. Value2 returned 27.94% since inception, as against 24.15% by its benchmark index S&P BSE 500. When the schemes were launched, they tilted their portfolios towards mid-sized companies as the stocks of such companies were available at attractive prices. While different fund houses have different definitions of mid-sized and small-sized companies, Value1 and Value2 had close to 95% of their portfolios in small and mid-sized companies by July 2014, as per Value Research. “Since equity markets had bottomed out in 2013, we could pick up a lot of small-sized companies. These were well-managed companies that were available at good bargain prices; the idea was to get in some of them early,” said S. Naren, executive director and chief investment officer, ICICI Prudential Mutual Funds. Naren is also the co-fund manager of both the schemes. Investments in companies like Bajaj Finserv Ltd, Motilal Oswal Financial Services Ltd and Power Grid Corporation of India Ltd benefited Value1, whereas investments in Bharat Electronics Ltd, Gateway Distriparks Ltd as well as Power Grid Corporation of India Ltd helped Value2.

The dividend strategy

Many closed-end funds launched between 2013 and now were designed and launched with the intent to pay frequent dividends. Some of these, like Value1 and Value2, were launched with only dividend plans. “If we look back at the 2007-09 period, we see that most investors did not take their money out when valuations reached all-time highs. So, when markets fell, pulling down their schemes’ net asset values (NAVs) as well, investors lost out on gains. So we decided to have a closed-end structure, where people stay invested with discipline, and at the same time, take dividends as and when valuations climb and we book profits,” said Naren.

Did they pay regular dividends? As per a Mint analysis (see table), the biggest dividend distributors in the 2013-16 period have been closed-end funds launched in this period. Value1 and Value2 are amongst the 10 largest dividend distributors in this period.

Mint Money take

Answer two questions before you decide to roll over. Have the scheme’s characteristics changed since the time you originally invested? And, does it make sense to remain invested in closed-end schemes?

Given the run-up in the mid-cap stocks—the S&P BSE Mid Cap index went up 43.58% between 1 January 2014 and now—Naren said that both the schemes will now follow a multi-cap strategy. The track record is good and the scheme may still perform. But not everybody is happy. “It is not a mid-cap scheme anymore. The fund will be opportunistic from here on. So if you’re just looking at returns, they are okay,” said Bengaluru-based Srikanth Bhagavat, who runs Hexagon Capital Advisors Pvt. Ltd.

Value1 and Value2 will remain closed-ended. “No one knows how the markets will shape up in 2 years’ time. The performances of the schemes have been good so far, partly because they got the launch timing right. But the redemption time will be close to the 2019 elections, lending a bit of uncertainty,” said Deepak Chhabria, founder and chief executive officer, Axiom Financial Services Pvt. Ltd, adding he doesn’t recommend such closed-end funds.

We agree. Having enjoyed the good run in these schemes, it’s best to switch to one of ICICI Prudential’s existing, well-performing, open-ended schemes to have the flexibility to withdraw when you wish.