- Wealth PMS (50L+)
ICICI Prudential is introducing a fund of fund, the ICICI Prudential Strategic Metal and Energy Equity Fund of Fund, NFO opens from 17th Jan to 31st Jan 2022. Here’s our quick take.
ICICI Prudential Strategic Metal and Energy Equity Fund of Fund (the Scheme) is an open-ended fund of fund scheme that invests in the units/shares of First Trust Strategic Metal and Energy Equity UCITS Fund.
So what’s the investment philosophy of the First Trust Strategic Metal and Energy Equity UCITS Fund?
This is an open-end fund incorporated in Ireland. The Fund’s objective is to seek to deliver long-term total return from income and capital gains with lower volatility than an equity portfolio. The Fund invests in equity securities related to gold and oil which are listed or traded on Regulated Markets Worldwide.
How ICICI Prudential is pitching this fund:
All investors tend to be susceptible to home-country bias. Therefore Indian investors tend to be invested in the 3% slice of global GDP that represents India. We should look to diversify globally.
However, for most investors, international diversification means being invested in US equities, and that too mostly in Technology stocks. Technology stocks valuations are at or exceeding dot-com bubble levels, while Gold and Oil stocks are available at attractive valuations. (their words not ours)
Therefore, their core pitch is global diversification into non-technology stocks.
Investment Process and Top Holdings
The investment process of the First Trust Strategic Metal and Energy Equity Fund seems as convoluted as the name.
In short, start with Gold and Energy stocks in equal proportion and increase weight to the sector showing lower correlation to “currency factor” and higher returns. At the time of the NFO, the fund has 123 holdings, with 31% allocation to gold stocks and 69% to Energy stocks. The largest holdings are all Oil & Gas companies:
Performance-wise, the underlying fund has only been around since Feb 2021. In that time it has outperformed the Indian market indices, the Nasdaq 100, and its benchmark, the S&P Global Natural Resources Index.
11 months of performance does not give us much to go by. So we won’t draw conclusions based on performance.
The fund’s marketing deck offers itself as the solution to those who are only allocated to the US. But 90% of this new fund’s holdings are in North American companies, with 3.7% in Australian companies and 2.9% in South African companies. So, not particularly global.
The idea of diversifying beyond India is sound. But picking a sectoral fund to diversify does not make sense unless you have specific know-how about the right time to enter global Gold and Oil companies to be able to make that call.
The primary vehicle for diversifying internationally should be passive broad-market index fund of funds or ETFs over specialized sectoral funds.
We would put this fund into the “too hard” pile and avoid.
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