With the domestic stock market near record high levels, investors are wary of taking an exposure at these valuations. In such an environment, an equity fund with a decent track record of identifying winners using the relative valuation approach, may be a good choice. Plus, value funds can also contain losses better than outright growth funds during deep or prolonged market corrections.
Rated 5 stars by bl.portfolio Star Track rating methodology, Bandhan Sterling Value Fund (formerly known as IDFC Sterling Value Fund) is a good pick if you are looking for these attributes and investing with a horizon of 5 years or more. It has an over 15-year performance track record, decent returns and outperformance credentials, and a flexi-cap portfolio approach. Since 2020, the fund has pulled itself out of an extended patch that weighed it down in 2015, 2016, 2018 and 2019. Here is a low-down.
One of the main pitfalls of pure value investing in India is that the country is a growth-oriented equity market. As such, absolute value/ pure value opportunities occur intermittently. Relative value is a method of determining an asset’s worth that takes into account the value of similar assets. This is in contrast with absolute value, which looks only at an asset’s intrinsic value. This is why funds like Bandhan Sterling Value (portfolio PE of 32.5 vs category average of 30; portfolio PB of 4.8 vs. category average of 4.3), using a relative valuation approach, may have slightly higher valuation. It identifies value prospects via relative valuation tools, including ratios such as Enterprise Value (EV)/Sales, Operating Cash Flow (OCF)/EV, and Price/Book (P/B).
The slightly higher portfolio valuation could be due to a bias towards better quality businesses, more so in recent times, in two ways. One, the fund has bumped up exposure to companies with lower net debt/ EBITDA, and more prudent allocations to ‘Financials’ (top sector choice) by cutting exposure to non-Nifty lenders, and higher focus on franchises looking at structural improvements to the business model.
Relative value with quality bias can help in both bull markets and during phases when market drivers change. Relative value allows the portfolio to lay emphasis on business growth and visibility, and the quality component ensures no swift de-rating given the relative higher margin of safety, even during pullbacks. Also, relative valuation can help avoid investments in deep value stocks that can fail to re-rate for sustained periods of time.
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A standout feature of the fund today is its more conservative market capitalisation approach (halved small-caps from 42 per cent in 2019 to 21 per cent in 2023). Prior to SEBI categorisation, Bandhan Sterling Value was more of a mid- and small-cap offering. Daylynn Pinto, who managed the scheme since 2016, now looks for relative value opportunities across m-cap segments.
With mid- and small-caps becoming frothy in recent times, such a flexi-cap approach fits well. From a low of 14 per cent in March-2021, large-caps now account for a little more than half of the assets, while both mid-cap and small-cap allocation has been halved. In both 2021 and 2023 YTD, this has paid off, with the fund securing top quartile positioning. However, its large-cap allocation is not as high as the category average (62 per cent), and peers such as Tata Equity P/E and UTI Value Opp. (both 64-65 per cent), HDFC Capital Value Builder (73 per cent) and ICICI Pru Value Discovery (70 per cent). This can, however, be a disadvantage in a deep correction, where small and mid-caps may suffer disproportionate damage.
The improving performance of the fund in the last few years is a signal things are taking shape for the better. In trailing 3-, 5-, 7-, 10-year periods, Bandhan Sterling Value ranks among the top-3 schemes in the value/ contra category. It has also comfortably beaten its benchmark, S&P BSE 500 Total Return Index in these periods. In terms of average rolling returns (annualised), the fund has comprehensively outperformed the peer value fund average (with at least 15-year NAV history) by 300-600 basis points in 1-, 3- and 5-year periods.
Its current top holdings are ICICI Bank, Axis Bank, Jindal Steel & Power, ITC, HDFC Bank, Reliance Industries, CG Power and Industrial Solutions, SBI, Poonawalla Fincorp and VRL Logistics.
The fund’s modest size (over ₹6,500 crore compared) is an advantage and helps in portfolio manoeuvrability. At this size, the fund will not find it difficult to maintain meaningful positions in mid and small-cap stocks that offer relative value. This is an edge vis-a-vis some peers with large asset bases, especially when the sector or stock calls go awry.