BE IT THE NEIGHBOURHOOD kirana shop or the modern retail outlet, bargaining gets best deals. The premise here is that the seller is not quoting a price that is favourable to the buyer. Hence, negotiations happen. Investing in stock market is quite similar. The only difference here is that things are online and it is a bit tough to negotiate with thousands of faceless investors sitting around the country trading by ‘ticks’.
For a seasoned investor, however, there are always pockets of bargain available in the market. They often happen to be spaces that are overlooked, avoided or unloved by the crowd at large. For a long-term investor, they are an opportunity to make outsized gains, as you get to buy a good company at a price less than its intrinsic value.
Spotting such opportunities may be a tough and time-consuming task for a retail investor. Also, one may not have the resources to find out the true value of a stock. This is where mutual funds come to the rescue. Investors who are looking for such opportunities can opt for the value category schemes where one gets an opportunity to own stocks that are thoroughly vetted by market experts but available at a bargain.
Warren Buffett’s take on value is best summarised in this quote; ‘Price is what you pay; value is what you get’. Is the market price of a stock its true value? Not necessarily. Without understanding the intrinsic value of any object, you will be susceptible to deals that are only good for the sellers.
Margin of safety
Value-oriented equity mutual funds look for stocks that offer ‘value’ at the price it is quoting. The stocks in a value portfolio would be names which are available at a discount to its intrinsic value. But, how much should be the discount? This is where ‘margin of safety’ comes in. Like it sounds, margin of safety indicates the difference between intrinsic value of a stock and market value. The higher the difference, the higher is the margin of safety.
Means to identify value
There are various ways in which a value stock can be identified. It could be with the help of financial matrices such as the Price to Book Value (P/B) or Price to Earnings (P/E) ratio, to name a few. Once the stock becomes a part of the portfolio, the waiting begins. The aspect one has to remember while waiting is that markets can remain irrational for long periods of time.
As the market recovered from the lows in March, it was quality and not value that led the recovery. In the times ahead, there is a good probability that value will make a strong comeback, as quality fatigue sets in. Also, there are several pockets in the markets that provide a good opportunity for investments with attractive valuations, healthy dividend yield, and earnings comfort.
Among the value funds, ICICI Prudential Value Discovery Fund is the largest with around Rs12,000 crore assets and it has an excellent track record basis the fact that 80 per cent of the time in the past 15 years its five-year daily rolling returns was more than 12 per cent. A SIP of Rs10,000 a month in the fund since inception would have grown to Rs64 lakh!
The scheme is flexible in moving across market capitalisations to explore attractive investment opportunities. Currently, the portfolio suggests that the fund manager is bullish on software, pharma and power stocks while it is underweight on banking and financials. The portfolio composition suggests that the fund is well positioned to withstand volatility, owing to relatively higher exposure towards stocks/sectors that are offering high margin of safety and are defensive in nature.
Author is co-founder, Griffin Capital Advisors LLP.