ICICI Prudential AMC to shut two schemes, return Rs 7 bn to investors

ICICI Prudential's asset management division took a gutsy call recently. The portfolio management services (PMS) is shutting down two of its schemes and returning the money to the investors. Both schemes are run with a focus on small-caps and both are managed by Aditya Sood. The PIPE (Private Investment in Public Equity) and Small Cap Portfolio Series I will return about Rs 7 billion. This is a relatively small proportion of the PMS corpus of about Rs 40 billion.

This decision is more or less unheard of in the Indian context though it does happen more often in developed markets. However, ICICI Pru has in the past closed down a couple of schemes, returning capital plus profits when it closed down the PMS Wellness Portfolio and the PMS Exports Portfolio.

The reason given is that small cap valuations are now so rich that the scheme cannot find decent investments. These two schemes had been launched in late 2013. At that time, the Nifty Small Cap 250 Index was trading at a value of about 2250. It is now at a value of 7085. The index has seen capital gains of 220 per cent in this period of just over four years. It is now valued at a price to earnings ratio of 78 (last four quarters, free-float weighted). That indicates why these two schemes would have faced problems finding decent value in the small cap space at the moment. Presumably the investors will have made excellent returns as well.

The most famous decision of this nature, perhaps one of the earliest as well, occurred in the 1960s when Warren Buffett closed down a fund for similar reasons. Buffett later also offered to return money to investors in Berkshire Hathaway though most of his investors (sensibly) refused the offer.

It is the sort of decision that money managers very rarely take for several reasons. One is obvious: if you don't manage money, you don't receive fees. Pragmatically too, most managers will hope to keep finding the odd winner and to try out periods of extreme over-valuation and under-valuation. A third reason is that there is always an element of timing in such a decision, even if it is made entirely on fundamental grounds. An over-valued market and India is undoubtedly over-valued, especially in the small-cap space, can continue to run up indefinitely, while the money keeps flowing in. So the manager is making a call that the market is very close to a top, even if he or she doesn't do this explicitly.

There are behavioural aspects to such a decision as well. Investors always second-guess buy/sell decisions and this influences their future willingness to park their fund with the same house. If the small-cap market segment does run up much further, even investor who have received excellent profits will blame the PMS for that opportunity loss. Of course, they would also blame the house if the market collapsed and they were left with their money stuck in a scheme that was logging capital losses! So, it's an extremely gutsy decision to take, and more so, just prior to a Budget when a large segment of market watchers are expecting more goodies.

There are wider implications in such a decision. The small cap segment of the market is not very well supported by institutions. It tends to be more of a playground for retail investors and traders. This sort of PMS scheme is one of the relatively few institutional elements of support. If ICICI Pru is cutting back exposure that is one signal that the institutional money is pulling out of this segment. If this sparks off other institutional pullouts from this segment, retail investors could be left high and dry.