Value-oriented funds: Patience pays

Even though the schemes have had a rough run recently, it pays to stick on for longer

Value-oriented schemes is one category of funds that has had a fairly rough run over the past couple of years. Most value-oriented funds have underperformed their respective benchmarks — mainly the BSE 500 TRI, Nifty 500 TRI and BSE 200 TRI — over one- and three-year time-frames. Funds in the category saw NAV erosions of 1.6-26.6 per cent over the past year.

Given that value-investing generally depends on going down the market capitalisation curve, many schemes bet on mid- and small-caps to the tune of 50-60 per cent of their portfolios, and have had to face the rough end of the market gyrations in the last year or so.

But, does that mean you should exit these schemes once and for all? Not necessarily.

Still worth betting on?

The oft-repeated statement that value gets created over longer time-frames in equity certainly holds true for value funds.

 

 

If the performances of at least 7-8 of the 12 funds with long-term track records are anything to go by, an investor willing to wait for 5-10 years can derive an additional 3-7 percentage points more than the standard benchmarks. Of course, there will be extended periods of underperformance, given that most value-oriented funds have substantial mid- and even small-cap investments, which are inherently volatile. But when markets do rally, the capital appreciation from quality beaten-down stocks tends to be far higher than that for momentum picks.

Aditya Birla Sun Life Pure Value was the worst-performing scheme in the category; it fell over 26 per cent in the last one year. But despite such a steep fall, returns of the scheme over five- to 10-year periods are 20-21 per cent, a good 5-6 percentage points higher than the BSE 500 TRI or Nifty 500 TRI. The story is similar for L&T Value.

ICICI Prudential Value Discovery has a large-cap bias and underperformed in the last few years. But a look at its long-term returns suggest that investors with the appetite to stick around for 7-10 years would have reaped rich returns.

Most funds in the category have a generic definition of value investment as ‘companies trading at lower than their fundamental value’. However, a couple of them offer a bit more explanation. Tata Equity PE, for example, has a policy of investing 70 per cent of its portfolio in stocks with price earnings multiples lower than the Sensex’s on a rolling 12-month basis. Invesco India Contra, as its name suggests, takes contrarian bets, and also buys into stocks that are on the verge of a turnaround. These funds do tend to stick to such mandates more often than not.

Some schemes in the value category have not done well even over longer time-frames (UTI Value Opportunities and Templeton India Value). But most of the quality names from the ones mentioned earlier are certainly worth latching on to for the long term.

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