ICICI Prudential Value Discovery has managed a healthy 31%. Outsized returns in these four funds have propped up returns for the entire category. The remaining 13 funds have clocked more sober returns ranging from 19% to 28%. Amid favourable conditions, this performance by most value funds seems underwhelming. It is particularly disappointing in the context of the prolonged stretch of muted returns in the past. Now value investing is a style where returns are lumpy in nature. It can take a lot of time for the underlying value to unlock and translate into returns.
Only a few value funds have delivered outsized returns
Funds with a deep value approach have done better in turnaround.
But when the swing towards value does occur, returns usually come in a burst. During this window, the alpha generation in value strategy is often quicker and far greater than in any growth-oriented fund. This is inherent to the return profile of value strategy. So when conditions turn in their favour, value funds would be expected to make a killing. Arun Kumar, Head – Research, FundsIndia, remarks, “In value investing, when the tide turns, the uptick tends to be very sharp and generally ends up compensating for several years of underperformance in just over 1-2 years.” But as the recent showing suggests, this has not really materialised. So why have value funds failed to live up to their billing?
Experts suggest that many value offerings do not strictly adhere to the value investing code. In fact, most take a blended approach, marrying value with growth style of investing. This is evident in the high portfolio PEs reported in some of the funds. Rushabh Desai, Founder, Rupee with Rushabh Investment Services, observes, “Many funds tagged as ‘value’ are not pursuing a true-to-label value approach.” In fact, after facing several years of underperformance, a few value funds succumbed to the market’s preferences and diluted own value bias, suggests Kumar. “Some value funds have got pressured into moderating value skew. Those who have stuck to their guns are the ones who made the most of the current uptick.” This is also evident in the superior performance of some diversified equity funds that are not classified under the ‘value’ banner but run a value-conscious style. Several prominent schemes from the stables of HDFC AMC are examples.
There are also variations in the ways some fund managers play value. While some prefer the deep value zone (cheap valuations), others like to hunt for relative value—when a stock is cheap compared to industry peers or own historical valuations. Kaustubh Belapurkar, Director, Manager Research, Morningstar Investment Advisor India, points out, “Funds taking a deep value approach have generally done better amid this turnaround.” Similarly, value funds with a mid and small cap tilt have delivered better outcomes in this phase, compared to those leaning heavily on large caps. Further, some value funds occasionally take cash calls as a tool to provide downside protection. But this ploy has not worked in their favour.
Kumar says, “Imagine you have underperformed for years and at the very moment when the value upswing happens, the fund is leaning on cash. Missing out on this initial uptick prevents the fund from capturing the big opportunity.” Investors who have persisted with any of these underperforming value funds expecting a big payoff are bound to feel aggrieved. Should you throw in the towel? “If even after two years of value turnaround, your fund is not in the game, there may be no point holding on,” says Kumar. Some like Desai feel investors consider persisting with value offerings for a bit longer given that value style is expected to do well as long as there is slowdown in growth, high inflation, higher interest rates and quantitative tightening. A shift may only be warranted if the fund has been struggling for more than 7-10 years, or underperforming peers by a big margin. Else, he suggests giving the fund another 12-18 months to improve its return profile.
Generally, stick with funds which have displayed superior outcomes across multiple value cycles. Some of the stars of current value upcycle have not coped as well in the past (Templeton India Value, IDFC Sterling). Few of the recent stragglers (Invesco India Contra, UTI Value) have delivered better results earlier. Funds like Nippon India Value, Invesco India Contra, Kotak India EQ Contra, UTI Value and ICICI Pru Value Discovery have performed well across cycles. Chronic laggards include ABSL Pure Value and Quantum Long Term Equity Value.