Innovation is the buzzword these days in the corporate world, and now there is a mutual fund offering that aims to grow wealth with companies that adopt innovative strategies. ICICI Prudential AMC has unveiled ICICI Pru Innovation Fund, whose new fund offering (NFO) opens between April 10-24. This open-ended thematic fund seeks to generate long-term capital appreciation by predominantly investing in equities and units of global mutual funds/ETFs that can benefit from innovation strategies and themes. Here is a detailed review.
Innovation rationale
Innovation is anything that proposes an alternative to existing products, services or solutions offered by the existing or a new company or introduction of new products. The broad intent for products, services or solutions-related innovation is to bring economic benefit and change that is sustainable and evolving. Broadly, there are three major types of innovation: radical, disruptive and incremental.
ICICI Pru Innovation Fund proposes to invest in the companies : i. at the initial research and/or a product development stage, service or process or solutions; ii. at pre-launch, testing, experimental stage of a product, services and process or solutions; iii. launch/post-launch stage of the product, services, process or solutions, which can be at an early stage of their life cycle and/or is still moving above the lifecycle curve.
Innovating companies outperform the non-innovative players as they fare better in organic growth through innovation thereby providing better opportunities for wealth creation. For instance, the MSCI ACWI IMI Innovation index, which represents the performance of a set of companies that are associated with the development of new products and services focussed on select innovation themes, has delivered a 5-year return of 10.33 per cent CAGR vs. 6.58 per cent by parent index MSCI ACWI IMI. The innovation index trades at a trailing PE of 57 times.
Investment strategy
Depending on which side of the argument you are on, some believe that innovation is difficult for well-established companies, while others think the resources needed to innovate are absent in early-stage firms. The truth, as they say, is somewhere in the middle. Innovation can happen anywhere, and technology is not the only conduit for innovation. Innovators can be found across different sectors such as power, chemicals, pharma & healthcare, FMCG, automobiles, telecom, financial services etc. The gamut of innovation ranges from product to processes, and sometimes may even reach beyond this construct.
ICICI Pru Innovation Fund will invest a minimum of 80 per cent in companies adopting innovation strategies and themes, and overseas securities adopting the same . There is a 20 per cent asset window for global exposure. According to discussions with fund managers, the fund will target opportunities that can bear fruit in 3-4 years. The portfolio will be compact (40-45 stocks) and built based on bottoms-up stock picking. It is going to m-cap agnostic, but there will be a bias towards growth and quality factors. In terms of guard rails, there will be a limit of 7-10 per cent for megacap, and 2-5 per cent for small and mid-cap stocks. There is no pronounced cash strategy.
The investment universe for the scheme shall be companies and sectors forming part of the Nifty 500 index (Nifty 500 TRI will be the scheme’s benchmark). The scheme may also invest in companies that shall derive benefits from innovation. Usually, stocks with an ‘innovator tag’ may trade at a premium valuation, which may be linked to above-average revenue/profitability growth, low-debt, higher margins or high free cash flow generation. A case in point is MNC stocks listed in India.
The minimum application amount is ₹5,000 (plus in multiples of Re 1). There is an exit load of 1 per cent applicable for pulling out before 12 months. The fund managers of the scheme will be Anish Tawakley and Vaibhav Dusad and Sharmila D’Mello (for overseas investment).
Our take
The success of thematic bets depends on entry/exit timings. However, innovation being an overarching and possibly multi-year theme, may not be overtly sensitive to timing. The focus on innovation being a factor in portfolio construction is interesting.
We have previously seen Kotak Pioneer Fund, an open ended equity scheme investing in a pioneering innovation theme launched in Oct-2019, provide reasonably good 3-year returns of 36.4 per cent vs. 31.75 per cent of Nifty 500 TRI.
The launch of the ICICI Pru Innovation Fund happens when a normalising interest rate environment appears on the cards. As globally and domestically, central banks seem to approach fag end of the interest rate hike cycle, growth stocks, including those with a heavy focus on innovation, may perform benefitting the scheme if it sticks to growth/quality bias.