With the turbulence in equity markets only getting worse, most equity fund investors are wondering what they should be doing now should they redeem or stay invested? At Personalfn, we believe that equities are for the long-term (at least 3-5 years) and a dip in stock markets must be viewed as an opportunity to add to the portfolio. Another positive about falling markets is that it gives investors an opportunity to evaluate the performance of funds from various categories. That way they have an idea about which fund categories have stood the test of time.
This time around we review value funds and find out if they have managed to live up to investors expectations. Before venturing any further, let us first understand what value funds bring to the table.
What are value funds?
Value funds are diversified equity funds which pursue the value style of investing. Simply put, value investing involves identifying fundamentally sound stocks that are trading at a discount to their fair value. Usually the fund manager buys these stocks and holds them until the mis-pricing in the stock value gets corrected.
Value style of investing works particularly well during a bear phase in the stock markets. This is the time, when the fund manager has more opportunities to invest in stocks trading at a discount to their fair value. By buying low and selling high, value funds take on lower risk than growth funds, which tend to buy high and sell higher. This makes value funds particularly suitable for investors with a moderate risk profile.
Compared to growth funds, the value style of investing is associated with a longer than average investment horizon.
How value funds have fared
| |
NAV
(Rs) |
6-Mth
(%) |
1-Yr
(%) |
3-Yr
(%) |
Since
Incep.
(%) |
Std.
Dev.
(%) |
Sharpe
Ratio
(%) |
| DSP ML Equity (D) |
38.95 |
-33.4 |
-1.2 |
33.2 |
26.0 |
8.64 |
0.19 |
| Tata Equity P/E (G) |
30.56 |
-34.1 |
1.1 |
27.7 |
31.1 |
8.94 |
0.20 |
| Templeton India Growth (D) |
43.25 |
-26.0 |
-1.4 |
24.5 |
19.5 |
8.43 |
0.15 |
| ICICI Pru. Discovery (G) |
24.40 |
-35.6 |
-14.8 |
18.0 |
25.9 |
8.61 |
0.04 |
| UTI Master Value (G) |
29.62 |
-39.3 |
-6.4 |
14.4 |
22.5 |
9.54 |
0.08 |
| BSE Sensex |
|
-31.7 |
-4.8 |
25.1 |
|
|
|
(Source: Credence Analytics. NAV data as on June 27, 2008.)
(Standard Deviation highlights the element of risk associated with the fund. Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument)
For a well-rounded analysis, we have only considered value funds that have been in existence for atleast 3 years. We have also considered variants of value style funds that invest in neglected stocks as also in companies that generate growth at reasonable valuations.
As is apparent from the table, value funds have pitched in a mixed performance. DSP ML Equity with a return of 33.2% CAGR over 3-Yr is the best performing fund, followed by Tata Equity P/E (25.1% CAGR). Both the funds have outperformed the broad markets. On the other hand, UTI Master Value (14.4% CAGR) is found wanting on the returns parameter vis-à-vis peers and index.
Volatility
Standard Deviation is a measure of the risk that a fund has exposed investors to. Templeton India Growth (8.43%) delivers the best performance, while UTI Master Value (9.54%) fares the worst.
Risk-adjusted return
Sharpe Ratio is a measure of returns delivered by a fund per unit of risk borne. With a Sharpe Ratio of (0.04%), ICICI Pru. Discovery’s performance can only be described as dismal. Simply put, as compared to its peers, the fund has failed to adequately compensate investors for the risk that they have been exposed to. Tata Equity P/E (0.20%) occupies the top slot on this parameter, closely followed by DSP ML Equity (0.19%).
What should investors do?
Now the question is, should investors consider investing in value funds? That would ideally depend on their risk appetite, investment objective and existing portfolio, among a host of other factors. At Personalfn, we have always maintained that a one size fits all approach doesn't work while investing. An investment avenue that is apt for one investor could be grossly unsuitable for another. Therefore, investors would do well to consult their investment advisors/financial planners to determine the suitability of value funds in their portfolios.
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