The Hindu Business Line : Focus on intrinsic value

Funds that adhere to “value investing” aren’t all that common in the Indian context, with just a handful of the over 200 diversified equity funds positioned as value-oriented funds. Fidelity Mutual has now flagged off Fidelity India Value Fund that would follow value style investing to generate long-term returns.

Fidelity India Value aims to identify undervalued stocks that hold potential to deliver long term risk-adjusted returns. Undervalued stocks would typically mean stocks trading at less than their intrinsic/assessed values. Some of the quantitative metrics used in identifying undervalued stocks could be a low price-to-earnings ratio, price-to-book ratio, price-earnings to growth ratio, enterprise value to sales or a high dividend yield.

The fund manager is hoping to focus on companies that are out of favour in the marketdue to short-term factors. Such mispriced securities offer opportunities for value investors; who exit once the difference is discovered by the rest of the market as well.

Value investing in India

Value investing has delivered fairly consistent returns in the Indian context. If one were to go by the MSCI India Value Index, value investing has been an out performer over one- three- and five-year periods compared with the MSCI India Growth Index as well as the Sensex.

Over a five-year period for instance, MSCI India Value Index demonstrated a compounded annual return of 28 per cent, a whopping 12 percentage points over the MSCI Growth Index’s return of 16 per cent. Over a three year period, the MSCI India Value index delivered 15 per cent, a good 7 percentage points over the Sensex. But ‘value funds’ in the Indian context have not delivered exceptional returns, although there have been short bursts of out performance. Value investing in the Indian context has taken the form of “value oriented” funds such as ICICI Pru Discovery and Templeton India Growth Fund or dividend yield focussed funds.

For instance ICICI Pru Discovery, delivered exceptional returns in 2005, outperforming the funds in diversified equity category. However, in the bull rally of 2007, the fund yielded only half as much as some of the top diversified funds.

Besides, value funds such as UTI Master Value, Tata Equity P/E declined as much as their growth peers during the 2008 decline militating against the assumption that value funds contain downside risks better than the market. However, few funds such as Birla Dividend Yield Plus and UTI Dividend Yield managed to contain declines better in the 2008 fall.

Margin of safety

On reason for the less-impressive performance of these value/dividend yield funds compared with the MSCI India Value index could be that the these funds may not strictly exit stocks when the ‘margin of safety’ reduces or in other words when the mispricing between intrinsic value and market value narrows. For instance, the price to book ratio of many of these funds are close to 4 (which is the Sensex P/BV), suggesting that in a rally, these funds may be continuing to hold on to their previous choices, rather than exiting them.

Only a few funds, such as Templeton India Growth and ICICI Pru Discovery appear to be active in exiting stocks that can no longer be classified as ‘value’. In the Indian context so far, actively managed equity funds with a growth style have outperformed value funds.

In a rising market, adhering to a value style may involve active churning of the portfolio, given that stocks can get re-rated very swiftly in the Indian context — with value picks turning to growth stories.

That the fund can invest up to 10 per cent in foreign securities would provide it with a slightly larger universe of value picks.

The new fund offer closes on December 15. Mr Nitin Bajaj will manage the fund.

More Stories on : New Fund Offer | Mutual Funds

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page