I bought some apparels yesterday and I got a really good 'value for money' deal.
How many times have you heard somebody say this?
What is 'value for money'?
In simple term, it is the worth of your money spent on whatever you purchase. The important word here is 'worth'.
In the world of investing, a 'value buying' refers to buying securities i.e. stocks of companies that are trading at a discount to their intrinsic value.
Investopedia defines intrinsic value as the perceived or calculated value of a company, including tangible and intangible factors, using fundamental analysis. Also called the true value, the intrinsic value may or may not be the same as the current market value.
Value Investing is more concerned with business fundamentals than factors affecting the market sentiment.
Equity mutual funds that follow value investing strategies are called Value Funds. According to SEBI categorisation norms, a mutual fund house can offer either a Value Fund or a Contra Fund, not both.
In a contra fund, the fund manager does not necessarily limit his/her buying decision to the intrinsic value of the company but also takes contrarian bets going against the market perception. This is a fundamental difference between contra and value investing.
Value investing, on the other hand as mentioned earlier, involves identifying fundamentally sound stocks that are trading at a discount to their fair value. The fund manager may follow different approaches while practising 'value investing'. So, value investing finds its place in the profound quote, "Beauty lies in the eyes of the beholder" by the Greek philosopher, Plato.
Value Funds aren't for the faint-hearted investors. They are a high-risk high-return investment proposition.
Graph 1: Value funds: How are they placed on the risk-return spectrum?
Note: For illustrative purpose only.(Source: PersonalFN Research)
On the risk-return spectrum, Value Funds find are placed between Focused Funds and Divided Yield Funds. That said, a Value Fund/s can form a part of your core portfolio if you are an aggressive investor, willing to high risk, and have an investment time horizon of at least 5 years.
Would Value Funds make a good investment in 2019?
As you might be aware, barring a few index stocks which have propped the markets, most others have taken a huge knock on account of poor market sentiment. Many mid-sized and even frontline companies are down more than 30% from their 2017 highs. This offers fund managers of Value Funds a good 'value buying opportunity' to discover companies with robust fundamentals at cheaper valuations. And in turn, if their conviction and assessment of these companies go right, Value Funds offers you as an investor wealth creation opportunity in the long run. Hence, investing in Value Fund/s in 2019 might pay-off.
Which are the best performing Value Funds?
Table1: Report Card -- Value Funds a valuable proposition?
Data as on February 18, 2019
(Source: ACE MF)
*Please note, this table only represents the best performing Value Funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for an indicative purpose. Speak to your investment advisor for further assistance before investing.
In 2018, value funds performed poorly on account of the weakness in the broader markets. Only Quantum Long Term Equity Value Fund and UTI Value Opp Fund managed to outperform the S&P BSE 500 Total Return Index (TRI).
However, over 5-year time period funds such L&T India Value Fund, Tata Equity P/E Fund, JM Value Fund, ICICI Pru Value Discovery Fund and HDFC Capital Builder Value Fund outperformed S&P 500 TRI by a significant margin.
Similarly, the other decent performers in the Value Fund category are:
✔ Principal Dividend Yield Fund
✔ Templeton India Equity Income Fund
These schemes have managed to outperform their respective benchmark indices over longer time frames and across market cycles, outperforming the category average return.
A word of caution...
To identify the best value funds, avoid relying excessively on past performance. Do keep in mind: past performance is not indicative of future returns. Hence, if you are investing in top-performing schemes of the past, anticipating that they will be top performers of 2019, you may be proved wrong.
Wrong ways of picking a Value Fund:
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By giving undue importance to returns generated by a scheme during bullish phases
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Not considering the track record of the scheme in handling downside risks
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Giving importance to the short-term market outlook
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Relying blindly on star-ratings
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Depending extensively on the past track-record of a scheme
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Disregarding qualitative aspects associated with mutual fund selection
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Ignoring your personalised asset allocation
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Relying on the advice given by friends and relatives unqualified to give you advice on mutual funds
The outlook for 2019:
(Image source: freepik.com)
Being an election year, 2019 would expose you to high drama and high (market) volatility. Geopolitical tensions in the West Asia region, uncertainty pertaining to trade-war tensions between U.S. and China, the possibility of crude oil prices boiling yet again (due to supply shocks), and flagging economic growth in many parts of the world, will test the patience of market participants. Besides, Nobel laureate, Paul Krugman, is of the view that the global economy could witness a global recession this year.
On the domestic front, too, there are headwinds viz. losing growth momentum, depreciating Indian rupee, Current Account Deficit (CAD) widening, possible slippages to fiscal deficit targets set by the government, risk to the inflation trajectory (as cited by the RBI), liquidity crunch, slowdown in consumption, unemployment, and farm distress, among many other factors.
Further, if India gets an unstable government at the centre, a sell-off in the market cannot be ruled out.
On the aforesaid backdrop, if Indian companies fail to live up to the expectations of investors on the corporate earnings front, in the interim it would weigh on the performance of Value Funds. But if managers successfully discover value buying opportunities, then, in the long run, it can make a positive impact on the performance of Value Funds.
So, while this would be an appropriate time for you to start investing in Value Funds, patience will be the key.
Before you invest in Value Funds do remember this:
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Don't invest in them unless your time horizon is at least five years and have the stomach for high risk.
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Markets might take longer than expected to recognise the true worth of the underlying companies in the portfolio of a value fund and until then it might remain highly volatile.
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You should consider your financial goals before investing.
If you decide to invest in value funds, prefer direct plans and invest through Systematic Investment Plans (SIPs), as that can help you mitigate the volatility (with rupee-cost averaging) and power your investments with the benefit of compounding.
How to pick the best Value Funds for 2019?
Quantitative criteria:
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Performance and risk analysis
This parameter analyses the fund's consistency in performance across various market periods with decent risk-adjusted returns. The fund should be ranked on quantitative parameters like rolling returns across short-term and long-term durations, such as 1-year, 3-year, and 5-year periods, and on risk-reward ratios like Sharpe Ratio, Sortino Ratio, and Standard Deviation over a 3-year period.
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Performance across market cycles
To ensure that the fund can perform consistently across multiple market cycles, compare the performance of the schemes vis-a-vis their benchmark index across bull and bear market phases. A fund that performs well on both sides of the market should rank higher on the list.
Qualitative Parameters:
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Portfolio Quality
The portfolio quality of a mutual fund scheme points at how it is likely to perform in the future. Here's what you should pay attention to:
Adequate Diversification - The fund should not hold a highly concentrated portfolio. A concentrated portfolio heightens the risk involved. Hence, the portfolio of a fund should be well-diversified and the exposure to the top-10 stocks should be ideally under 50% while concentration to one particular sector should not exceed 30-35%.
Low Churn- Engaging in high churning of your portfolio can result in trading and high turnover cost. Therefore, you also need to consider the portfolio turnover ratio and expenses and penalise funds involved in very high churning.
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Quality of Fund Management
To pick a worthy Value Fund, the quality of fund management is one of the essential parts. Hence, consider the fund manager's experience, his workload, consistency in clocking returns, and proportion of the AUM (Assets Under Management) of the fund house that are actually performing. Therefore, check the following points before investing:
The fund manager's work experience - He/she should have a decent experience in investment research and fund management, ideally over a decade. But note that experience isn't always enough. Some schemes managed by fund managers with 15-20 years of experience haven't necessarily done consistently well for a long time.
The number of schemes managed - A fund manager usually manages multiple schemes. Thus, you need to check if the fund manager is not loaded with a large number of schemes. If he is managing more than five open-ended funds, it should raise a red flag.
The efficiency of the fund house in managing your money - You need to check if most of the schemes from the fund house are doing consistently well or a handful of them. A fund house that performs well across the board is an indication that sound investment processes and risk management techniques are in place.
Yes, we know that the above list is a lot for an average investor to look at. It involves a lot of number crunching and much of the data is not easily accessible. But if you do need to narrow down on the top funds, these factors are of utmost importance.
Watch this short video on selecting mutual fund schemes:
PersonalFN adopts comprehensive mutual fund research process to select the best mutual funds. Based on a composite score, which has a weightage to each parameter, a view on each fund recommended under various mutual fund research services is provided.
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Author: PersonalFN Content & Research Team