The over two-dozen strong value funds space has a new entrant. Baroda BNP Paribas Mutual Fund has launched Baroda BNP Paribas Value Fund, which closes for subscription on May 31. This is the first actively managed value fund launched in about 18 months in the space, given that the last four launches were from the index and ETF side.
Here is a deep dive into Baroda BNP Paribas Value Fund NFO.
Baroda BNP Paribas Value Fund will be an open-ended equity scheme following a value investing strategy. Value investing strategy is based on buying stocks below their intrinsic value in expectation that the stocks will get re-priced properly in future, or buying low and selling high.
Value investing has reaped rich rewards in recent times. Take a look below to understand how trailing returns of value funds stand across one, three, and 5-year periods.
The good performance of value funds is in sync with how value investing-based indices have done in recent times. Take a look at how value indices have done (see table). Of course, astute stock selection would have helped top funds generate alpha.
Baroda BNP Paribas Value Fund aims to pick opportunities available at market, sector and stock levels. The fund shall evaluate parameters such as present value of discounted projected cash flows, PE, PB, EV/EBITDA, EV/tonne etc. It will aim to look for companies with strong fundamentals across m-cap and sectors without any bias; hence a m-cap and sector-agnostic approach.
The fund believes using its strong screeners it can avoid value traps. It shall construct a portfolio considering opportunity size and risk limits.
Actively-managed value funds carry a total expense ratio (TER) of 1.66 to 2.57 per cent. Index funds and ETFs following value strategy carry TER of 0.14-1.01 per cent.
Pros and cons of value funds
Value funds can allow you to catch potential gems with unrealised potential. Since value funds typically are more long-term oriented, they tend to buy stocks that are less volatile. Hence, the standard deviation of value funds, in general, is lower than growth-oriented funds over the long term. This is partly on account of lower declines in value funds behaviour during market drawdowns.
Also read: Baroda BNP Paribas Floater Fund: Should you invest in the NFO?
At the same time, value funds may require you to stay invested for long periods of time. Do not be swayed by the last one or three-year returns and assume that this is going to happen always. Valuation re-rating in many stocks takes a long time to happen and you will have to wait in the interim. If you expect value funds to perform each year, that may not happen (see table).
To practice value investing successfully, research plays a crucial role because the fund manager has to buy stocks that are trading at a discount to their potential value.
Value-style investing contains losses better than growth in big bear markets. It also delivers bigger gains in the initial legs of a new bull market. But when a bull market takes wing and establishes itself, growth stocks overtake their value counterparts. Any new value fund investor should take note of these trends before they allocate a portion of their portfolio to such schemes.
Value-style investing experience matters. When Baroda MF and BNP Paribas MF joined forces to become Baroda BNP Paribas MF last year, the resulting AMC was said to benefit from BNP (a leading global asset manager) and that would help leverage their global experience, expertise and processes to build a stronger asset management platform.
One year is too short a time-frame to judge the performance and so we are ignoring the middle-of-the-road ranking of the Baroda BNP Paribas MF equity schemes across one, three and 5-year timeframe.
Those wishing to go proven names can consider the top established schemes in the value funds category and wait for Baroda BNP Paribas Value Fund to develop a track record before taking exposure.
bl.portfolio MF Star Track Ratings gives 5 stars to both ICICI Prudential Value Discovery and JM Value Fund, while it gives 4 stars to Bandhan Sterling Value Fund and Nippon India Value Fund.