In the sharp market rally from the post-Covid era, there was pretty much a broad-based rally across segments. Specifically, factor investing tracking momentum, value and alpha styles delivered extraordinary returns. The style that remained a relative underperformer was quality. From FY21 through till FY25, quality was left behind other styles of investing.
With the market correction from September 2024 to March 2025 and the years of underperformance there is now renewed interest in the quality theme.
The reciprocal trade tariff advocated by the US, continuing geopolitical challenges, and slowing domestic corporate earnings momentum, are fuelling the push to quality. Reasonable valuations in quality companies and heavy macro challenges amid slowing global growth are additional reasons.
In fact, the US has witnessed a decline in GDP growth in the first quarter of this calendar year. There are fears of stagflation hitting that country.
Amidst this backdrop, ICICI Prudential has come out with a new quality fund that will be actively managed.
Read on, for more on the new fund offering, and find out whether you should be investing in the scheme.
Betting on quality
Two key factors point to how business cycle and corporate profitability are on a gradual downtrend. Industry capacity utilisation – reported by the RBI – after touching 75 per cent levels in early 2014, has been reducing and moving to 70 per cent levels. Corporate profitability as a percentage of GDP has remained close to 5 per cent in FY25, the same as in FY22. In periods of economic uncertainty, quality could outperform.
ICICI Prudential Quality fund would start with a set of 625 stocks that are part of the overall coverage universe. Quality filters such as return on equity (RoE), return on capital employed (RoCE), financial leverage, net cash balance and capital allocation would be used to select about 250 stocks from the above set.
Additionally, ICICI Prudential would use valuation metrics on this quality pack to further narrow the selection to 40-60 stocks. The idea is to buy quality at the right price.
The fund seeks to break the stereotype of quality being available only in segments such as IT and FMCG. It would look for opportunities in sectors such as pharma, cement, banks, retail and NBFCs.
This new scheme will invest across sectors. It would also have the flexibility to invest across market capitalisations – large, mid and small.
ICICI Prudential would adopt both top-down and bottom-up approaches while selecting the stocks in its portfolio as the situation demands.
Should you invest?
In the 11 financial years from FY10 to FY20, quality (Nifty 200 Quality 30 TRI) was the leader as it outperformed in four of those years. Momentum (Nifty 200 Momentum 30 TRI) and value (Nifty 200 Value 30 TRI) topped the charts for three financial years each. But as mentioned earlier, over the past five financial years, quality companies and indices have underperformed.
Over a 15-year timeframe from April 2010 to March 2025, on a five-year rolling basis, the Nifty 200 Quality 30 TRI has not given negative returns. It has managed to deliver 17.4 per cent on an average, which is higher than the value and alpha style indices as well as the Nifty 200 TRI itself. The quality index has given 10-20 per cent returns 71 per cent of the time on a five-year rolling basis over the aforementioned period.
In raging bull markets, quality as a style can underperform.
Over the long term, quality can be rewarding. Indeed, when the 20-year CAGR of the Nifty 200 Quality 30 TRI has given 17.9 per cent, good 3.6 percentage points higher than the Nifty 200 TRI.
When risk-adjusted, returns for the quality style is higher than all other style and the broader market index.
ICICI Prudential has many funds from the equity stable that have done exceptionally well over the past 15-20 years.
Also, given that very few active funds are available in the quality theme, investors with a long-term perspective can invest in the scheme via small lumpsums or SIPs. The new fund must be used as a diversifier to the overall equity portfolio with exposure restricted to small proportions. Investing in the fund would require a medium risk appetite.
138 funds, 19 gilt and bond ETFs, 16 liquid ETFs & 103 index funds tracking benchmark indices by holding fixed income securities in matching proportions
Published on May 10, 2025
