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  • Why value mutual funds are a good bet in current soaring stock market

    The Economic Times Wealth, June 5, 2017

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    Why value mutual funds are a good bet in current soaring stock market
    Investors should note that value funds can underperform significantly during bull phases, when value stocks go out of favour.
    The stock market is scaling new heights and investors are at a loss to understand where they should deploy their money now. With valuations way above historical averages, the risk-reward equation is clearly not in favour of investors. In such a scenario, equity funds with a value bias are the best bet. They help you invest in a portfolio of stocks that carries lower downside risk, and yet offers healthy returns over time.

    Value funds are run with a clear emphasis on the tenets of value investing. The focus is on identifying stocks that are currently priced at a discount to their intrinsic value or at a price that is not reflective of their true worth. By buying a stock at a high margin of safety, the risk is mitigated to some extent while enhancing the return potential. There are only a handful of equity funds in the market which ply this strategy. Most funds available today have a growth bias, meaning they invest in stocks with healthy earnings growth visibility, with lesser emphasis on the stock price. As such, these funds carry higher risk at times. Value funds offer a better risk-reward proposition, particularly in a heated market environment.

    Value as a strategy has fared well in recent times and continues to hold potential. "Value funds are well placed to unearth good opportunities and protect the downside at a time when valuations are steep," says Vidya Bala, Head of Mutual Fund Research, FundsIndia. She reckons a mid-cap fund that follows a value-based approach would be a better option now given the sharp run-up in valuations. "If one is looking for mid-cap exposure at this point, having a mid-cap fund with a value bias may help contain the downside risk to some extent," Bala adds.

    Investors should note that value funds can underperform significantly during bull phases, when value stocks go out of favour. However, these tend to deliver healthy returns over the long-term by outperforming during a downturn or a range-bound market. Pranav Uppal, AVP, Mutual Fund, Bonanza Portfolio, asserts, "These funds are good if you have a long-term horizon. It can take a lot of time for the underlying value to unlock, during which these funds can underperform."

    Experts maintain the merit of a value fund lies in its use as a diversification tool. Kaustubh Belapurkar, Director, Fund Research, Morningstar Investment Advisor India, says, "A value fund can be added to complement the growth funds in the investor's portfolio."

    Even within this small basket of funds, there is a lot of variation in flavour. There are Such funds focus on stocks that are either priced at a discount or at a price that does not reflect their true worth. This mitigates risks to some extent while enhancing the return potential. In a soaring market, value funds provide safety net hardly any true-to-label, pure value-focused funds. Most adopt a combination approach where value philosophy is used in conjunction with growth. While most funds have a multi-cap approach, some are run with a clear mid-cap or large-cap focus. The largest fund in this segment, ICICI Prudential Value Discovery, adopts a flexi-cap approach. The market-cap allocation of the portfolio can vary significantly as it seeks to move into segments where it reckons the risk-reward is more favourable. While the fund maintained a distinct mid/small-cap flavour for long, stretched valuations in that segment have prompted the fund manager to favour largecap stocks in recent times. It has also sharply cut down its portfolio size from around 70 stocks five years ago to just 40 stocks today, reflecting the limited value in the market.

    It also tends to look at the relative valuation of stocks while identifying its value bets, apart from its standalone valuation. So, it will gauge the value in a stock relative to that of others in the same industry, rather than merely in relation to its own historical valuation. This is similar to the approach taken by L&T India Value, although the latter runs a heavily diversified portfolio and carries a higher mid-cap bias.

    Birla Sun Life Pure Value is a prominent offering that largely remains true to its value mandate, while keeping a distinct mid-andsmall cap tilt in its portfolio. The oldest fund plying value-based strategy-Templeton India Growth Fund-runs a highly concentrated portfolio with up to 30 stocks, remaining predominantly large-cap focused.

    Quantum Long Term Equity, another value-based fund with a healthy track record, has a differentiated approach where it tends to increase cash levels in the portfolio if the fund manager feels valuations are too high to provide good investment opportunities. The fund currently holds 14% of its portfolio in cash-higher compared to its peers, but the fund has previously held more than 30% of the portfolio in cash. Such cash calls have at times led to bouts of underperformance, but the approach has largely held the fund in good stead over longer time frames.

    Newcomer Parag Parikh Long Term Value follows a 'go-anywhere' approach which allows it to take exposure across sectors, market capitalisation and even geography. All of these are well managed funds, but investors should make their pick based on their individual asset allocation preference and comfort with the fund's investing approach.

    The original article could be seen here.

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