The rise of value-oriented funds: Value catches up with largecap, multicap peers

This is a new trend which has surfaced in the last one month and is driven by PSU banks, metal, capital goods, utilities’ outperformance

Kumar Shankar Roy Dec 22, 2020

Value investing straegyCan comebacks be bigger than setbacks? Well, if one looks at value-oriented equity mutual funds then recent trends suggest a turnaround is on cards. After sluggish movements for quite some time now, value-oriented fund category in recent time has started beating largecap and multicap categories. In the last one-month period, value funds have clocked an average 8.4% gain compared to 7.6% gain of multicap schemes and 7.4% gain of largecap offerings. This performance by value funds has helped them narrow the gap that can be seen in slightly longer timeframes such as three months. Read on to know more.

What are value-oriented funds

Value-oriented category has about 18 schemes from different fund-houses. At its core, value-oriented funds deploy the age-old tactic of buying low and selling high, with a key difference. The stocks that are bought at high potential but are quoting at a discount to their fair/intrinsic value. This is the ‘value’ that the funds talk about.

The fact is the stock market is not always efficiently matching a stock’s price with its intrinsic value. Value-oriented funds seek to benefit out of this inefficiency in the market to generate reasonable returns. The oldest existing value funds are HDFC Capital Builder, Templeton India Value, JM Value and SBI Contra. The biggest existing value funds are ICICI Pru Value Discovery, L&T India Value, Invesco India Contra, UTI Value Opportunities.

Do note that value funds remain a niche category. Not every investor can handle value funds. This is because value funds are suitable for investors who are willing to participate in the process of discovering stocks. A stock that is currently undervalued is often overlooked due to various reasons. Value-oriented funds are suitable for investors who are willing to invest for a fairly long term with an aim to benefit over the full investment cycle and have over 5 years of investment horizon.

What changed recently

After the crash in Mar-2020, Indian markets have been recovering. The initial part of the rally was led by growth stocks (which show absolute growth potential). In the middle part, midcaps and smallcaps started joining the party. Undervalued stocks provide a reasonable margin of safety and help to minimize downside risk in a market fall, but when markets rise not every undervalued stock participates right away. As valuations of Indian markets started touching the long-term average, the upward momentum started touching stocks, whose prices were low relative to their historic performance, earnings, book value, cash flow potential and dividend yield.

What is important to note here is that stocks belonging to PSU banks, metals, NBFCs, capital goods and utilities have been performing from November. Many value-oriented funds have core holdings in these stocks and hence they have started showing good growth. That has put a spring a step in value-oriented funds. In the last 1-month period ended Dec. 14, Templeton India Value is up 12.7%, IDFC Sterling Value is up 11.5%, ABSL Pure Value is up 10.7%, ICICI Pru Value Discovery is up 9.4%, Nippon India Value is up 8%. In comparison, BSE 100 is up 6.64%. Overall, value funds as on category average have reported 8.4% gain in this one month period compared to 7.6% gain of multicap schemes and 7.4% gain of largecap offerings. Also, the 3-month performance shows that value funds are fast closing the gap with largecap and multicap categories.

Juzer Gabajiwala, Director, Ventura Securities said: “Albeit by a small margin the category of value funds managed to beat NSE 500 Total Return Index (TRI) on 1-month return, which improved the 3-month return as well. Some value funds such as IDFC Sterling Value Fund benefited from the rally in mid and small caps, offering deep value. A few others also outpaced the broader markets. HDFC Equity Fund which has been banking on PSUs, mining, capital goods companies and utility companies did well as value stocks fired.”

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].