Fund Manager Talk | ICICI Prudential's quality-focused pitch for long-term gains

As markets tread cautiously in a world of stretched valuations and tempered earnings expectations, ICICI Prudential AMC is turning the spotlight back on an old faithful—quality. In this edition of Fund Manager Talk, Ihab Dalwai, Senior Fund Manager, makes a case for why it’s time to revisit this underappreciated theme as a long-term portfolio anchor.

Edited excerpts from a chat:

Markets are marching to a new tune amid all the stress around tariff war and Indo-Pak tensions. How are you reading this phase, and what’s your outlook for equity markets in FY26?
We believe the market is likely to remain volatile in the near term owing to various uncertainties in the form of trade tariffs, potential US slowdown, geo-political tension to name a few. On the domestic front, even though certain pockets in the market have seen sizable corrections, valuations continue to remain above average. Also, going forward, earnings growth trajectory is likely to moderate. As a result, we believe the upside expectations should be calibrated in line with earnings growth.

In a year where earnings surprises are mixed and macros are wobbling, what’s your compass as a fund manager—valuation comfort, earnings resilience, or thematic plays?

Reasonable valuation and earnings resilience is important. Moreover, scouting for ideas generally happens in underperformed, under owned segments of the market where expectation is muted.

Let’s talk about the ICICI Prudential Quality Fund. What makes this fund timely in today’s volatile, valuation-sensitive environment?
Quality as a theme has underperformed the broader market over the past four-five years. This indicates a lack of investor interest resulting in reasonable valuation, making it a good entry point if one adopts a long term investment philosophy. In the backdrop of the current global economic uncertainty, and moderate earnings growth expectation from corporate India, we believe this is an optimal time to consider the quality theme.

Many would argue that the “quality” segment has already had its day in the sun. Why do you think now is the time to double down on it?
Over the past few months, quality as a theme has gathered pace in terms of performance. But that should not deter investors from considering quality, especially long term investors, as this theme is just coming off from a 4-5-year underperformance phase.

The fund promises to flex across sectors and market caps. Could you decode how that flexibility plays out in practice? Is it more bottom-up conviction or macro-driven allocation?
We believe there are quality names available across sectors and market capitalisations. From a portfolio construction perspective, we aim to reduce sector concentration. There will be active bottom up stock picking within the mid and small cap space. Over time, our sector preferences will be reflective in our portfolio positioning.

Is this fund an all-weather bet or should investors treat it as a satellite allocation—especially with value and momentum themes still buzzing?
We believe quality based offering is an all-weather fund, especially at a time when this style is coming off after a period of underperformance. Generally, if one invests in high quality companies with robust management which can allocate capital well, the earnings tend to compound for a long period. Hence this strategy can be looked at for long term investments.

The fund has high ROE, ROIC, and sound capital allocation as selection filters. But in a world crowded with data, how do you spot quality before it becomes consensus?
Generally, when it comes to quality investing, the consensus or non-consensus view is not on earnings growth but on sustainability and durability of moat which is helping the company earn its high ROE. A large part of the return in quality investing is generated when the market believes that the moat believed in is not sustainable while the investee company is able to earn high ROE for an extended period and is also able to reinvest for growth.

With the Quality Fund entering a space where the growth versus value debate is heating up, what’s your message to investors still sitting on the fence?
Historically, quality as a strategy has worked well for even those investors who are not very aggressive on the risk spectrum as the risk adjusted return for quality has been superior to the broader market and most other styles of investing. Hence if an investor is looking for a fully invested equity scheme to allocate to, then they may consider this quality based offering.