Tired of chasing momentum and ‘flavour of the season’ stocks or funds with such an investment mandate? Then you must probably look at value investing as a strategy, as over the long term of five to seven years, stocks are anchored to fundamentals and tend to appreciate in line with their inherent value.

At least, as an investor, the chances of going horribly wrong by investing in companies based on valuations (price earnings ratio, price to book value, etc.) and a set of other fundamental factors (debt, return on capital employed, dividend yield), are fairly low.

Based on such an investment philosophy, a new scheme — ICICI Pru Value Fund – Series 1 — has been launched.

It is a close-ended scheme with a lock-in period of three years, which means that it does not face redemption pressures. The scheme will invest in 25-30 ‘high conviction’ stocks, which would give a portfolio a compact look.

ICICI Pru Value has indicated that there will be no bias in choosing stocks based on capitalisation, which means that it is likely to be a multi-cap fund.

From the same fund house, ICICI Pru Discovery had an investment philosophy guided by value, but has now morphed into a high-quality, predominantly mid-cap fund, with an excellent track record.

Driving value

Locking into a value-themed fund now makes sense on a few counts. Over the last one year, the market has been highly polarised, with defensive sectors such as FMCG, pharma, telecom and select large software companies trading at very high valuations, while cyclical segments have been languishing. A select set of 15-20 stocks has been taking the markets higher. So, while defensive sectors trade at 22-23 times historic price-earning multiples, cyclical segments are available at 12-13 times.

This gap is the largest in the last seven-eight years. Next, mid-cap stocks are now available at big discounts to large-cap stocks and the gap has widened in the past year. This provides some opportunity to look at stocks that are available at attractive valuations with scope for improvement in fundamentals.

Of course, there is some danger in looking at investments from a value perspective alone. For example, public sector banks are available at a fraction of their book value. But the book is subject to increasingly distressed assets, which may not make them that attractive. Infrastructure companies too, may be available at low price-earning multiples, but they have execution challenges and are laden with debt.

The fund hopes to overcome these aspects by looking at other fundamental factors mentioned above, in addition to the quality of the management.

It must, however, be emphasised that all value plays generally take a large time to play out. So, investors with patience and a reasonable risk appetite can consider such funds with a time horizon of 7-10 years. The scheme is open during October 18-28 and the minimum investment is Rs 5,000.

Related Topics
comment COMMENT NOW