Union Asset Management Company, the investment manager for Union Mutual Fund, has joined the value-oriented fund bandwagon by launching the Union Value Discovery Fund, an open-ended equity scheme following a value investment strategy.
The new fund offer (NFO) period started from November 14 and will end on November 28. The scheme re-opens for continuous sale and repurchase from December 12 onwards. ‘Value funds’ have been a popular flavour as stock markets have in general struggled in recent times. Is Union Value Discovery Fund a good bet? Read RupeeIQ’s take.
This is the fifth open-ended equity scheme to be launched by Union Mutual Fund. Currently, Indian equity markets are facing headwinds in the form of volatile crude oil prices, trade war, rising cost of capital, weakening rupee and tightening liquidity.
The fund-house believes that all of these above-mentioned factors appeared to have led to a meaningful correction in the major equity indices. Union Value Discovery Fund would predominantly invest in stocks that are categorised as bargain stocks, and are temporarily out of favour, under-owned or turnaround companies.
The fund’s portfolio construction would be driven largely by bottom up stock selection. The scheme portfolio would be diversified, and investment would be made across market capitalisation. There are a number of stocks available that are close to their intrinsic value. Union AMC is confident that the value fund can create a portfolio of stocks that could benefit investors with long term investment horizon.
In a secular downtrend and range bound market cycle, the Union Value Discovery Fund will have more of value stocks and less of growth stocks. In a secular uptrend market cycle, the mix would be 50-50 between growth and value stocks.
At present, the fund-house tracks and invests in 122 stocks. This can go to 150 in the future.
On the above 122-150 stocks, the fund manager will use BMV filter (B – Business, M – Management and V – Value) and then segment the stocks into growth or bargain category. Do note that in growth stocks, the stock returns mostly come from earnings growth. In value stocks, stock returns mostly come from multiple re-rating.
The fund house looks at B (Business) by studying whether the company’s Return On Equity is more than Cost of Equity. It looks at signs of reasonable growth and also growth sustainability.
In M (Management), they look at Capital allocation, Strategy execution, Related party transactions, Remuneration, own stock dealings, etc. It also looks at subjective factors like Transparency, Communication, Integrity, and so on.
In V (Valuation), the fund manager will do internal research, conduct scenario analysis, probabilities and consider risk reward.
The fund wants to buy under-owned and out of favour sectors. This would be partly driven by bottom up stock selection. In bottom-up investing approach, there is total focus on the analysis of individual stocks. The fund manager focuses attention on a specific company rather than on the industry in which that company operates etc.
Concentration of stocks
The Union Value Discovery Fund will be a diversified scheme, which means there will not be heavy bets in a few stocks.
Market Capitalisation preference
The scheme will be essentially multi-cap. This means the fund manager will buy stocks across market capitalisation depending on the specific opportunity.
This equity fund will be nearly fully invested in equity and equity related instruments. Usually, it takes three months to fully deploy the money raised through an NFO.
At most times, the fund-house says that a major portion of the Union Value Discovery Fund portfolio will be invested in companies with price to current intrinsic value less than that of Nifty.
How value funds gain
The investment strategy of value funds has three parts. One, it buys a stock at a price closer to the fair value. Two, the fair value of the purchased stocks grows at a reasonable pace. Three, re-rating of the stock happens and the market price reflects this higher price, landing the fund a gain.
When the fund will sell stocks
This is exit discipline. There are three broad situations when it will sell a stock holding. One, the original investment rationale is substantially weakened due to various factors. Two, valuation re-rating, resulting in a meaningful reduction in expected returns in the medium term. Three, the fund manager finds an alternative idea with a better risk-reward payoff.
Benchmark – S&P BSE 200 Index
Fund Manager – Vinay Paharia. He the Chief Investment Officer (CIO) of Union AMC. In a professional career spanning more than 15 years, he has worked with Invesco Asset Management (India) Private Limited as Fund Manager – Equity. Further, he has also worked with DBS Cholamandalam AMC, K. R. Choksey Shares and Securities Pvt Ltd. and First Global Stockbroking Pvt. Ltd. as an Equity Research Analyst.
RupeeIQ take – Investors with long term investment horizon and who need portfolio diversification (in favour of value stocks) may consider the fund. Value funds can go through periods of under-performance if markets are driven by pure momentum. So, value funds are best as a portfolio diversifier. It is better to do a SIP in value funds than do lump sum investments. So, you could put a lump sum in the fund in NFO stage and when the fund re-opens for continuous subscription, do the SIP.
Disclaimer: The article is only for informational purposes. Investors are requested to consult their financial, tax and other advisors before taking any investment decision.