ICICI Prudential MF’s new Active Momentum Fund tracks momentum – not of price – but of earnings growth to determine the consideration set for its portfolio.
Price momentum can happen due to earnings momentum – which is good - or due to many other factors, some of which may not be good for mutual fund investors to get into.
This new fund therefore goes to the root cause of price momentum and selects only those where earnings momentum justifies price momentum.
This approach not only weeds out poor quality stocks, but also is designed to cushion falls to some extent during market corrections, as stocks with good earnings momentum typically fall less in a correction compared to those without it.
This will be an actively managed fund – in that the model provides a short-list of stocks for the FM’s consideration, and the FM then casts the portfolio with stock and sector weights, and then actively manages the portfolio.
Earnings turnarounds tend to last for couple of years or more – the idea is to spot earnings momentum early on and then ride the stock through its upward cycle until momentum starts lagging/falling. This enables the fund to capture most of the gains through a cycle rather than giving up some gains due to valuation considerations.
Mansavi sees financials and chemicals getting healthy representation in the initial portfolio as both sectors have a number of stocks where earnings momentum is being supported by price momentum currently.