Does value investing work in India?
It does, and it improves investors’ odds of getting higher returns
Pose this question to any random group of investors or professional fund managers in India today and the majority opinion is likely to be a ‘no’.
In the past decade, Indian investors who have sworn by the growth style of investing have left their value-seeking counterparts in the dust.
If you list 10-year multi-bagger stocks, most of them started out with expensive valuations but have only gotten pricier over the decade, as they churned out a steady profit growth immune to economic ups and downs. ‘Cheap’ stocks with less predictable earnings, in contrast, have only gotten cheaper in this period.
With recent portfolio performance in their favour, growth- style investors have many convincing-sounding arguments for why value investing is a washout in India.
One is that stocks trading at low valuations in India often represent businesses that are sinking or badly governed, essentially making them value traps.
Another is that given the high growth trajectory of the economy, India is inherently a growth market. Value investing is for unlucky folks in mature markets such as the US where growth is hard to come by.
But the problem with such arguments is that they are heavily influenced by the recent experience. If you don’t go by trailing returns, how has value-investing fared in India against growth investing? Not badly at all, we found by running a rolling- return analysis on the MSCI India Growth and Value indices over the past 19 years.
To gauge the actual return experience of investors who adhered to the value or growth styles of investing, we ran five-year rolling returns on the month-end MSCI India Growth and Value indices on a gross return basis, for the entire period from December 2001 to October 2019.
The analysis showed that investors in the MSCI India Value Index, on an average, earned a five-year return (CAGR) of 14.9 per cent over this 19-year period, while investors in the MSCI India Growth Index averaged 12.9 per cent.
Averages are fine, but did value-investing manage higher returns when the times were good?
Well, the distribution of five-year returns over this long period shows that value-style investing improved the investor’s odds of making a high return.
For instance, out of the 215 month-end periods we looked at, the MSCI India Value Index delivered a return of 15 per cent or more, a good 38 per cent of the time. The MSCI India Growth Index managed this only 28 per cent of the time.
The MSCI India Value index also improved your chances of a 20-plus per cent plus return with a 21 per cent chance, while growth style did it only 12 per cent of the time.
The only blot on value-investing was that, over five-year periods, it exposes investors to a higher probability of losses. Investing for five years, value investors encountered losses 9 per cent of the time while growth style investors faced them only 4 per cent of the time.
Stretch the investment horizon to 10 years and the results still favour value-investing. On 10-year rolling returns, we found that the MSCI India Value Index beats a 15 per cent return, a good 62 per cent of the time while the MSCI India Growth Index was well behind at 41 per cent.
When they perform
The above statistics clearly show that value-investing is far from a washout in India. But are there some phases of the market when value does well and others when growth takes over? Well, a comparison of calendar-year returns on the two rival indices since 1998 shows that the MSCI Value fared better than the MSCI Growth in 12 of the 21 years.
The years in which the MSCI Value Index significantly beat the Growth Index were 2000, 2002, 2003, 2007, 2008 and 2016. The years where Growth trumped Value by big margins were 1999, 2004, 2010 and every year from 2012 to 2015. This explains why growth investors have fared so much better in the past decade.
Broadly, the calendaryear returns suggest that 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.
The above results must be read with a few caveats. One, a big factor, which pegs up the long-term return on value style investing relative to growth is the contribution from dividends. By end-October 2019, the MSCI India Value sported a price-earnings multiple of 18 times and a dividend yield of 1.99 per cent.
In contrast, the MSCI Growth Index sported a PE of 31 and a dividend yield of just 0.80 per cent. The extra 1.2 percentage point that dividends add to the returns of the MSCI Value Index contributes in a big way to its outperformance. If you are a value investor, this argues for methodically reinvesting your dividend receipts.
Two, our use of the MSCI India indices for this exercise leads to a large-cap bias in the results. Even the value stocks that we are talking about here are not unknown businesses trading at rock-bottom valuations waiting to be discovered, but large and well-known franchises trading at relative discounts to the market.
The top five constituents in the MSCI India Value Index in October were Reliance, Infosys, HDFC, Bharti Airtel and SBI, while those in the Growth Index were TCS, Axis Bank, HUL, HDFC and ICICI Bank.