What is value investing and which funds follow this in India?
Value investing is an investment strategy that seeks to find stocks of companies which are trading at a significant discount to their intrinsic value. Value investing is different from growth investing where the emphasis is on finding stocks of companies which have strong earnings growth potential. Being a growing economy, in India growth investing has been a predominant investment style followed by most funds and very few funds use value investing as a primary investment approach.
Value investing as an investment strategy offers a higher margin of safety. It entails investing in companies that are trading at lower Price to Earnings (P/E) or lower Price to Book ratio (P/B) compared to peers. Value mutual funds typically have 20-30% lower P/E compared to normal mutual funds. Value investing funds also have lower turnover ratio compared to normal mutual funds.
Advantage of following value investing is that such funds offer benefit of lower downside risk as well as lower volatility compared to traditional equity mutual funds. Value investing can also offer better risk-reward profile in an overvalued market where most stocks have run up so much to carry a higher downside risk.
Let us look at some of the value investing funds to understand value investing performance in the Indian market-
Note: Data as on 5th Dec 2017, The returns are of the Regular plan variants
Definitions : Standard Deviation measures the absolute volatility of the fund. Sharpe Ratio measures the risk adjusted returns where risk is the volatility of the fund. Sortino Ratio is like Sharpe ratio with only difference being that it considers only downside volatility. Beta measures relative volatility of the fund with respect to the benchmark. Alpha measures excess return generated by the fund over above the market return.
- L&T India Value Fund
The fund is managed by Venugopal Manghat and Karan Desai with the objective of long-term capital appreciation with a higher focus on undervalued stocks. The fund is market cap agnostic and holds around 35-40% in large caps, 25-40% in midcaps and remaining in small caps. The sectors or companies that they focus on can be classified as cyclical, turnarounds and other special situations. These might be out of favor in the market but fundamentals offer a margin of safety for the investment. In the last 3 years, the fund has been able to offer good returns of 18.22% with higher protection from downside risk as seen through Sortino Ratio of 1.35 which is significantly higher when compared to benchmark S&P BSE 200 (0.60) and category (1.09). (Note: Higher Sortino Ratio is better)
- Aditya Birla Sun Life Pure Value Fund
The fund is managed by Mahesh Patil and Milind Bafna with an objective of consistent long-term capital appreciation by investing in stocks that the market is undervaluing. The fund primarily holds midcaps which constitute 40-60% of the portfolio, large caps are 20-30% and remaining are small caps. In its 7-year history, the fund has been consistent with value investing approach even in the face of higher returns in some years by growth investing approach. In the last 3 years, it has generated returns of 19.16% with significant alpha 13.82% over the benchmark and greater downside protection as seen through Sortino Ratio of 1.34 vs 0.60 of the benchmark.
- ICICI Prudential Value Discovery Fund
The fund is managed by Mrinal Singh with the objective of investing in value stocks which have attractive valuation when compared to earnings or book value. The fund is different from pure value investment strategy since it tries to find growth stocks at attractive valuations. The fund has changed its holdings in recent times to 83% weightage to large caps and rest in midcaps. Earlier the fund used to have a higher weightage for midcaps. In the last 3 years, the fund has delivered returns of 10.31% with a Sortino Ratio of 0.87 vs 0.66 of the benchmark S&P BSE 500. The alpha of the fund is 5.37%. The beta of the fund is 0.83, which shows that the fund has been relatively less volatile when compared to the benchmark. Over the last year, the fund has underperformed but remains one of the most popular value funds with around 17000 crores of assets.
- Parag Parikh Long Term Value Fund
Parag Parikh was one of the proponents of value investing in India. His firm manages the Parag Parikh Long Term Value Fund with the objective of long-term capital appreciation using value investing approach. The fund is managed by Rajeev Thakkar, Raunak Onkar and Raj Mehta. The fund has made significant investments (~20%) in foreign equities with Alphabet (Google parent company), Facebook, UPS, 3M and Apple appearing in top holdings. In the last 3 years, the fund has delivered returns of 13.8% with alpha of 8.65%. The fund has been true to its value investing philosophy by offering lower volatility and higher protection from downside risk as seen by a very low beta 0.53 (much less than 1) and Sortino Ratio of 1.18 vs 0.67 of the benchmark NIFTY 500.
Value investing approach can help investors in generating higher returns provided they have the right mindset and don’t get swayed away by their emotions as this approach is not common.
Invest in the above mentioned Value investing mutual funds on WealthTrust app.
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