Value investing is a strategy to spot stocks trading below their intrinsic values.
The domestic equity market is going through a rough patch this year amid subdued macroeconomic triggers. Rising crude oil prices, slower-than-expected earnings growth, trade war concerns and a falling rupee have dragged midcaps and smallcaps down by up to 15 per cent so far in 2018.
Voices are still echoing in the market that the risk-reward ratio in second-rung stocks is still not in favour of investors despite the recent correction. New investors who have entered the market in last five years must be facing difficulty in picking stocks.
Value-biased funds can be an option here. Value investing is a strategy to spot stocks trading below their intrinsic values at any given point of time.
Cashing in the opportunity, Tata Mutual Fund last week launched the Tata Value Fund Series-1, a close-ended equity fund with a tenure of 1,103 days which seeks to focus on stocks trading at a discount to their intrinsic values.
Value funds help investors take exposure to stocks that carry limited downside risks and have the potential to offer healthy returns over a period.
Going by legendary investor Warren Buffett, “Price is what you pay; value is what you get.”
That applies to not just stock market, but in any life situation. “Whether we are talking about socks or stocks, I like buying quality merchandise, when it is marked down,” says Buffett.
The Indian market is experiencing favourable opportunities for value investing at this point, says Sonam Udasi, fund manager, Tata Asset Management.
The market is going through a volatile phase. The S&P BSE Sensex touched its all-time high of 36,000 and then came down to oscillate around the 35,000 mark. A volatile phase in the market is best time to scout for value bets, as stocks tend to fall below intrinsic values.
“India’s robust growth story coupled with current value investing opportunities open the door for potential wealth creators through the value investing strategy,” Udasi said.
There are projections that the India will grow into a $5 trillion economy by 2025.
Value investing helps select stocks with a high margin of safety. A handful of value funds available in the market have managed to beat their benchmarks in last five years.
For instance, Parag Parikh Long Term Equity Fund – earlier known as Parag Parikh Long Term Value Fund – grew at 19.65 per cent annually in last five years. Nifty500 rose 16.01 per cent annually during the same period.
The portfolio of a ‘value fund’ usually comprises stocks of companies that the fund manager believes are undervalued based on a particular set (or combination) of metrics. These could either be peer metrics (relatively low price/earnings or price/book ratio compared with other companies in the sector) or intrinsic (current earnings or asset-based valuations compared with that particular company’s past trends), says Neil Parag Parikh, CEO, PPFAS Mutual Fund.
The advantage of investing in such funds is that one can take exposure to stocks that may temporarily be out of favour, but have the potential to revert to mean in the future.
Systematic investment in value funds has created a lot of wealth for investors. For instance, a monthly investment of Rs 1,000 in Aditya Birla Sun Life Pure Value Fund started in June 2013 would have now become Rs 1,13,590. L&T India Value Fund would have turned the same amount into Rs 1,06,000.
ICICI Prudential Value Discovery Fund delivered 23 per cent return CAGR in last five years, while Nifty advanced 12.36 per cent annually. Reliance Value Fund and JM Value Fund delivered around 20 per cent annualised returns between June 2013 and June 2018.
These funds do not stay in cash when there is a dearth of investible ideas. “Investing in such funds usually calls for greater patience compared with other fund categories. However, their performance has proved to be satisfactory when compared over an entire economic cycle (say 5 to 7 years). Also, in many cases (though not always), the volatility of NAVs of such funds has been lower than that other categories,” Parikh said.