The value investing theme continues to garner attention amid a pick up since October last year. Canara Robeco Mutual Fund launched a value fund a few weeks ago; another offering from Axis Mutual Fund is currently open for subscription. But how long a runway does this theme still offer?The markets are not letting up. Buoyed by ample liquidity, stocks across the market spectrum have seen prices soar. Amid this broader market uptick since October last year, the value investing strategy has also staged a dramatic revival. Even as the Nifty50 index has gained 45% since 31 October, the Nifty50Value20 index has yielded 52%. As corporate earnings rebound sharply, stocks and sectors that had been languishing for years are finding favour among investors. This has also given a fillip to returns of beleaguered value funds that had for long lagged behind other categories. But are new offerings entering the value investing arena at a ripe time?Experts are convinced the prevailing market conditions provide the right setting for value-centric play. With large sections of the market overheated, there is little margin of safety in several stocks. Investing in stocks that are trading below their intrinsic value makes more sense in this environment. If the market corrects in the coming years, value funds would be in a position to cushion the downside better than others. Kirtan Shah, co-founder and CEO, SRE Wealth, insists, “At market highs, value always does well over momentum. That’s how historically markets have behaved.” According to fund managers, it is not necessarily difficult to find good value picks even in overheated markets. Nimesh Chandan, Head, Investment, Equities, Canara Robeco MF, argues, “At such times, the crowds chase select ideas driven by certain narratives, often ignoring other pockets where valuations are cheap.” Value approach is about picking stocks where upside potential is higher and downside risk is lesser, Chandan adds. Sankaran Naren, ED and CIO, ICICI Prudential MF, says, “Even in current times, there are select sectors where valuations are attractive and many of such pockets are yet to deliver returns since 2008. Most sectors which are cyclical in nature present good value till the time central banks tighten monetary policy.”Naren draws parallels with past episodes. “Until September 2020, value was out of favour which was also the case during 1998-99 and 2007-2008. In value style, we have seen that investments made in 1999 did very well because at that point in time markets were largely focused on tech stocks. Similar was the case in 2007 when infrastructure was in focus,” he added.However, investors should not expect immediate results when taking this path. Value can underperform significantly for extended periods of time. Experts insist that merits of value approach become more apparent when looking at longer term performance. In fact, returns from value funds can be outsized if given sufficient time. The oldest fund in this segment—Templeton India Value—has delivered 16% CAGR since its inception in September 1996. The Nifty500 has fetched 13% during this time. The largest fund in this space—ICICI Prudential Value Discovery—has yielded 20% since launch in August 2004, even as the Nifty500 clocked 15%.Value funds have made a comeback with stellar 1-year returns 85922374Experts say the strength of a value-driven fund lies more in its ability to outperform or protect the downside better during a market decline. Over many years, this superior downside protection allows the fund to deliver healthy return. But this requires investors to remain patient and stay invested for the duration when returns seem elusive. Investors should be willing to give value funds a longer rope than others. “Global experience has always been that value as a strategy will not work all the time but tends to deliver sizable returns over the long run,” observes Naren.However, investors need to be picky while choosing value funds. Execution remains key to finding success in this approach. Stick to funds that maintain reasonable quality in portfolio and not compromise in the hunt for value. Some funds follow the traditional approach to value investing—scouting for beatendown names guided by low PE multiples. However, such stocks can often turn out to be value traps. Many fund managers insist on a more refined stance for identifying value. Chandan argues, “PE ratio often hides more than it reveals. Value investing is not about buying the cheapest companies; it is a broader philosophy that involves buying company at a price that is lower than its intrinsic value.”While it is advisable to skip most NFOs, it is more pertinent for value funds. Given how execution is critical and the varied stance taken by fund managers, investors should stick to proven offerings with established track record. Besides, value funds are best utilised towards diversification— to complement existing funds in your portfolio. In a market like India, funds biased towards growth stocks will continue to deliver healthy returns.
from Economic Times https://ift.tt/2WRiZUA
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