Every time there is a steep correction in the stock market, we see some experts proclaim it to be the best time to buy into good companies whose stock prices have been beaten down. While it is true that bottom fishing is not easy, and even though a sharp correction in the prices of fundamentally sound companies presents a good buying opportunity, it is easier said than done. Buying during corrective phases does not guarantee good long-term returns. The performance of value-oriented equity mutual fund schemes over the past five years is a testimony to this.

Stock selection, timing the entry and asset allocation are critical to determining the returns one makes when the market bounces back.

Over the past three years, the equity market has witnessed a decent rally, with the benchmark indices— the S&P BSE Sensex and the Nifty 50 Index — delivering over 11 per cent and 10 per cent annualised returns, respectively. In contrast, equity mutual fund schemes with a mandate to identify and invest in value stocks that are beaten down and hold good long-term promise, have not kept pace with the broad market.

The average annualised three-year return of 12 such value-oriented schemes was barely 5 per cent. Interestingly, none of the funds individually delivered returns either in line, or higher than, the broad market. These schemes underperformed their respective benchmarks, with an exception of Reliance Value Fund, which just about managed to outperform its benchmark during the period.

Laggards

Indiabulls Value Fund was the worst performer, shedding about 0.1 per cent annually over a five-year period. Aditya Birla Sun Life Pure Value Fund also recorded lacklustre performance, delivering a near-flat return of 0.41 per cent annually over a three-year period.

Other prominent laggards include Sahara Star Value Fund (1.9 per cent gain) and ICICI Prudential Value Discovery Fund (3.6 per cent gain).

Why the underperformance?

While many of these schemes managed to better their returns during the rally phases, their NAVs were on a free fall during market corrections. The steep losses made during the corrective phases ate into their overall returns. For instance, in 2017, when the broad market gained over 30 per cent, many funds managed to rake in gains higher than the market and their respective indices. Notable outperformers included IDFC Sterling Value Fund (62 per cent), ABSL Pure Value Fund (56 per cent) and Reliance Value Fund (45.9 per cent). However, in 2018, when the market turned choppy, these schemes shed most of the gains made in 2017 and this dragged their medium- to long-term returns.

Sample this: in 2018, ABSL Pure Value Fund topped the losers’ list, shedding over 23 per cent. Increasing exposure to underperforming themes such as pharmaceuticals and financials did not aid its performance.

Long-term performance

How has the performance been over a longer horizon? Not significantly better. The 11 schemes that have been in existence for the past five years have delivered 8.8 per cent annualised return. This is a tad lower than the 9 per cent gain made by the S&P BSE Sensex and the Nifty 50 Index.

The best performer among the value-oriented funds over the past five years has been L&T India Value Fund with a modest 11.7 per cent annualised gain.

Interestingly, investment in large- and mid-cap-oriented schemes, over the same period, would have delivered higher returns. The category average of large-cap, and large- and mid-cap schemes was in excess of 10 per cent. Investment in the top-quartile performers would have fetched 15-17 per cent annualised returns over a five-year period.

From their past performance, it is evident that a pure value strategy is probably not the best way to maximise returns. Rather a mix of growth and value has delivered better performance.

The writer is an independent financial consultant

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