Mutual Funds

Value investing, with exposure to global stocks

Satya Sontanam | Updated on November 29, 2020 Published on November 29, 2020

The scheme will invest 0-35 per cent of the corpus in overseas equities

DSP Mutual Fund’s new fund offer, DSP Value Fund, opened for subscription on November 20 and will close on December 4.

It is an open-ended scheme and will reopen for ongoing purchase shortly after the NFO closes.

Investment strategy

The fund follows value-investing principles and invests in stocks that trade at a discount to their intrinsic value. In selecting the stocks, the scheme eliminates poor quality and highly-valued stocks. That is, in terms of quality, the fund avoids stocks with high leverage, high price volatility, poor accounting and governance metrics, among others.

With regard to valuations, the fund eliminates stocks with high price to book ratio after adjusting for profitability or return on equity. Sectoral valuation trends – where some sectors such as consumer staples command premium valuations and others such as commodites trade at a discount to the broader market – are also factored in when eliminating stocks. In executing this strategy, the fund house assumes a linear relationship between P/B ratio and ROE. Hence, higher the ROE, the higher will be the valuation. According to the fund house, this assumption is supported by data over the past 10 years for stocks which are part of the BSE 200 index.

To start with, as per the fund house, the scheme may look at stocks in sectors such as construction materials, consumer discretionary, pharma/healthcare and information technology.

It will invest 65-100 per cent of the corpus in domestic equities, 0-35 per cent in overseas equities and the remaining in debt and money market instruments.

In case of domestic exposure, the scheme will pick stocks from the Nifty 500 and will be market-cap and sector agnostic. With regard to international exposure, the fund house plans to invest in international investment companiesthat practise value-investing strategy.

As per initial fund documents, the benchmark index for the scheme will be Nifty 500 Value 50 TRI. To better suit the portfolio holdings, the fund house plans to change the benchmark to Nifty 500 TRI once the scheme is rolled out.

The scheme is also expected to take cash calls up to a maximum of 35 per cent when there are not enough value investment opportunities, which seems to be on the higher side.

Peer comparison

Currently, there are about 14 value funds in India.

Value funds as a category have delivered average returns of 9.4 per cent, 1.5 per cent and 9.1 per cent over one-, three- and five-year periods, respectively.

As per BusinessLine Portfolio’s Star Track Mutual Fund Ratings, L&T India Value and Tata Equity P/E Fund (both rated five-star) are the two top-performing funds in the value category.

During the same periods, the Nifty 500 TRI delivered returns of 10.3 per cent, 6.2 per cent and 11.2 per cent.

The returns of the DSP Value Fund, as per the simulated portfolio for the above time period, has been 12.4 per cent, 6.7 per cent and 8 per cent, respectively. Note that the international exposure in the simulated and the actual portfolio will vary.

One major distinguishing factor of the DSP Value Fund with respect to the existing funds will be that the fund will allocate about one-third of the portfolio in overseas stocks.

Given that value-investing may take time to pay off, it is suitable for investors with a horizon of over 3-5 years.

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Published on November 29, 2020
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