Value funds lead returns tally
Value-oriented funds have outperformed other equity categories in recent months, after having lagged them over longer time-frames.
In the April-june 2020 quarter, value funds have delivered average returns of 21.41 per cent — outperforming large-cap, mid-cap, and small-cap funds.
Fund managers say the asset class looks attractive at the current juncture, and offers attractive risk-reward proposition to investors.
“Value, as a strategy, took the backseat for a long time. This resulted in an ever growing bias towards high-growth firms, regardless of valuation,” said Daylynn Pinto, senior fund manager (equity), IDFC Asset Management Company.
“With a gradual revival in the economy, along with lower interest rates, higher liquidity, and attractive valuations, we believe deep-value firms will likely show improvement in cash flows/earnings. This will provide opportunities to generate alpha,” he added.
Advisors believe such funds should be part of an investor’s overall diversified strategy, and allocation should be calibrated based on risk appetite and investment horizon.
“Value, by definition, indicates investing in stocks and sectors that are not being looked at favourably by the markets. This definition doesn’t have a time-frame. The value may be realised in 6 months or in 3 years, therefore investors need to be ready for periods in which these funds will underperform continuously,” said Amol Joshi, founder of Plan Rupee Investment Services.
“The recent spurt in performance should not be the sole criterion to buy into such funds. Given the volatility expected in the category, an investor should hold a long investment horizon, of at least 7 years,” said Vidya Bala, co-founder of primeinvestor.in. At the end of June, value and contra funds managed ~48,764 crore of investor assets. The category is still relatively small, given that it accounts for 6.8 per cent of assets managed by equity-oriented schemes.
Experts, however, pointed out that there could be points where such funds fail to contain the downside unless the fund manager exits the holding for which valuation has surged.
“Following a steep rally, some stocks move into the growth territory. When the markets correct, these holdings could come under pressure,” said Bala. Advisors say investors should look at value funds, but as part of their overall diversification strategy. “Just like investors should make an asset allocation between equity and debt, investors should consider a blend of growth and value strategies within their equity basket,” said Joshi.
“One cannot be overweight on any single style, given one doesn’t know when stock rotation or sector rotation will take place,” he added.