Prudential ICICI FMCG Fund: Hold

Recommendation: Hold

Aarati Krishnan

LIKE in most other FMCG funds, the returns on Prudential ICICI FMCG Fund, reckoned since inception, are uninspiring, with the current NAV at Rs 10.28 per unit.

This is attributable largely to the sharp markdown in FMCG valuations since the fund's launch.

In the 21 months since inception, the fund underperformed the Kothari Pioneer FMCG Fund but outperformed FMCG funds from the SBI and the UTI. Over 2000, the fund switched investments from second-rung to top-rung FMCG companies, and this should lend greater stability to its performance. Investors in this fund who have moderate return expectations can hold in expectation of improved performance.

Suitability: Since FMCG stocks offer prospects of steady rather than high capital appreciation, the fund is suitable for risk-averse investors with moderate return expectations, with an investment horizon of not less than three years. Investors may allocate a small part of their portfolios to such funds.

Performance: FMCG stocks currently trade at valuations that are at a substantial premium to the rest of the investment universe. Nevertheless, they attracted buying interest in the falling market of 2000 based on their potential to deliver consistent earnings growth. FMCG stocks are likely to continue to attract defensive buying on the bourses in light of their steady long-term prospects, which should augur well for the FMCG-dedicated funds.

The Prudential ICICI FMCG fund has followed up returns of 21 per cent in 1999 with a decline of 16 per cent in the NAV in 2000. While the fund underperformed the broad market in 1999, it outperformed it in 2000. From its lowest point of Rs 7.96 per unit in May 2000, the NAV has appreciated by 29 per cent till date, outperforming the broad market over this period.

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Portfolio: The fund started out by investing in both mid-cap and large-cap FMCG stocks. United Breweries, McDowell, Bhartiya International and Heritage Foods figured in the top holdings in 1999. However, most FMCG stocks suffered a sharp markdown in valuations during 1999.

With several top-rung FMCG companies available at attractive valuations in the first half of 2000, buying interest was restricted to these stocks, rather than the small and mid-cap stocks in the FMCG universe. Had the fund continued with its strategy of investing in mid-sized and small FMCG companies, it could have suffered a setback.

However, it switched investments from the second-rung companies to the frontline FMCG companies in the first quarter of 2000. The portfolio in September featured stocks such as ITC, Hindustan Lever, Britannia, Nestle and Dabur among the top holdings. Since the recent investments were probably made at lower valuations, this should have helped the fund reduce the average cost of its portfolio.

The present portfolio appears to be of good quality and holds scope for reasonable long-term appreciation. The shift in investment strategy could lead to lower volatility and greater stability.

Fund facts: The Prudential ICICI FMCG Fund is a mid-sized sectoral fund with a net asset size of Rs 73 crore by end of October 2000. The NAV of the growth option is now at Rs 10.28 per unit. The fund's dividend option paid out a dividend of 10 per cent in March 2000.