Value funds shine as ‘growth’ trade fizzles

A broad-based rally in the Indian equity markets has helped value-focused funds deliver superior returns in the past year. Value funds were out of favour as investors piled on to ‘growth’ stocks even at lofty valuations in the pre-pandemic world, leading to sharp polarisation in stock market returns.

But in the past year, value funds have started delivering returns as investors shift their stocks away from growth stocks to ones that are available at attractive valuations.

Mutual fund (MF) industry players believe that even now there is enough value in the market. “We believe value is in the early stages of playing catch-up with growth and quality, which have significantly rallied over the past few years. Also, several stocks of public sector undertakings (PSUS) and others, which have been beaten down names over the past several years, have caught investor attention due to their deep value. All of this put together has helped value funds gain traction,” said S Naren, ED & CIO, ICICI Prudential AMC.

The data from MF Explorer shows that the maximum return generated by value funds over the past year is 96 per cent and the average return is 59 per cent.

Value investing is largely investments in stocks that are undervalued and possibly ignored by investors but have room for appreciation in future. However, investing through value style differs from one fund house to another.

In ICICI Prudential Value Discovery Fund, the portfolio consists of stocks that have the potential for reasonable upside but are currently available at a discount to their fair/intrinsic value. Quantum Long Term Equity Value follows a bottom-portfolio construction process. Its approach to investing is based on the principles of long-term value, detailed, and extremely disciplined process.

“Value fund like ours perform well when risk is adequately priced. In a macro setting where there is a broad-based economic recovery and normal interest rate environment, equity returns are driven by earnings upgrade cycles and not just liquidity (flows). In such an environment, stocks react to fundamental triggers and value funds tend to do better,” said Sorbh Gupta, fund manager-equity, Quantum AMC.

Over the past year, ICICI Prudential Value Discovery Fund and Quantum Long Term Equity Value Fund have given returns of 61.2 per cent and 56 per cent, respectively.

According to market participants, in the stock market, value typically tends to emerge when investors fail to pay attention to positive for a long time, which invariably over time leads to the strengthening of a case for a stock or sector. A long period of negativity creates the right conditions for a sector or stock to outperform.

Despite the Sensex gaining 43 per cent in the past year, fund managers believe even today there are many sectors where valuations are attractive. “We believe most of the cyclical sectors represent good value until central banks tighten monetary policy. Within defensive sectors, pharma and IT represent better value compared to consumer sectors,” said Naren