Prudential ICICI Tax Plan -- Sharp swings in returns

Aarati Krishnan

INVESTORS in Prudential ICICI Tax Plan are likely in mid-way through their three-year lock-in period.

There is, therefore, no exit option available to them now. The fund has outperformed the narrow market indices by a comfortable margin since launch.

However, it has assumed a high degree of risk, with returns swinging sharply from year to year. Therefore, only those comfortable with such risk may contemplate fresh exposures in the fund, while others may stay away.

Between August and December 1999, the initial period after inception, the fund returned over 100 per cent, against an 8 per cent return on the Sensex. In 2000, the NAV plunged 40 per cent, while the Sensex lost just 20 per cent. In 2001, Prudential ICICI Tax Plan fared better than the index, losing just 10 per cent in value against a sharper 19 per cent erosion in the index levels.

The fund's exceptional outperformance in 1999 was clearly the result of its heavy weightage in IT stocks and its dalliance with some of the more speculative stocks in the IT universe. The same IT weightage dragged down the performance in 2000.

But with a fairly early restructuring of the portfolio and enhanced weightages to defensive stocks, the fund weathered reasonably well the bear market of 2001. The following features emerge from a study of the portfolio since June 2000:

The fund appears to have been quite aggressive in its sectoral allocations but diversified in its stock-specific exposures. No single stock, for instance, was allowed to account for more than 10 per cent of net assets, even in the bull markets of 1999.

However, through 1999 and until mid-2000, the fund maintained an overweight position in IT stocks. The fund had a 47 per cent weight in IT stocks in June 2000, rising to 48 per cent by September 2000.

Despite the conscious emphasis on diversification across stocks, the fund's performance has been quite volatile. This suggests that the aggressive sectoral allocation has influenced performance far more than the conservative exposure to its individual holdings.

The portfolio has undergone two major phases of restructuring between June 2000 and September 2001. Between June 2000 and December 2000, the fund trimmed several of the more volatile software, telecom and media stocks from its portfolio.Stocks such as Aftek Infosys, Global Telesystems, Mastek and Leading Edge Systems, earlier a part of top ten holdings, were replaced by old economy plays such as Reliance Industries, ITC, HDFC and Tata Tea. During this period, the fund sharply whittled down its exposure to software stocks, while holding its telecom and media exposures.

Between December 2000 and September 2001, the fund cut back on its IT exposure as a whole to replace it with other defensive sectors, such as pharmaceuticals and consumer goods. Over this period, exposures such as Sterlite Optical, Zee Telefilms, Padmalaya Telefilms, Digital and Mukta Arts gave way to Cipla, Bajaj Auto, Hero Honda, BPCL and SBI.

The sectoral allocations have changed significantly as a result. The total IT exposure was down from 47 to 16 per cent between June 2000 and September 2001. But exposure to healthcare stocks and consumer goods stocks moved up from 10 to 17 per cent and from 5 to 16 per cent respectively over the same period.

The fund marked up weightages to cyclical stocks over this period, with their weight rising from 26 to 38 per cent of the net assets. But growth stocks, accounting for 50 per cent of the net assets, continued to outnumber cyclicals by September 2001.

Despite its dalliance with some risky stocks, such as Himachal Futuristic, Global Telesystems, Padmalaya Telefilms and Aftek Infosys, the fund appears to have restructured its portfolio in time to avoid a very large hit.

An early entry into some of the favoured pharma stocks also appears to have bolstered recent performance.The portfolio strategy of the fund, however, relies to an extent on market timing and this appears to enhance the risk profile.