Stock with ‘substance’ goes a long and strong way

The ultimate aim of any long-term investor is to hold a portfolio which offers not just phenomenal historical returns but is also able to weather unfavourable market trajectory. Hence, for a long-term investor, stocks with ‘substance’ should take precedence over the stocks that offer a higher expected return in the short to medium period. This is the prime reason why ‘value’ investing style continues to remain a solid choice for investors, despite the fact that value is not as valuable a tool for investors as it used to be, thanks to the helicopter money showered by the global central banks, distorting the conventional valuation gauges.

Under the ‘value’ investment style, an investor picks up a stock that is not just trading below the intrinsic value, but also offers long-term potential on the basis of expected cash flow and sound dividend pay-out capabilities. Experts believe that the liquidity-fuelled rally is not tenable for the long-term and distended valuation could regress to the mean level. Furthermore, valuation gap between growth stocks and value stocks is at its highest in the last two decades, thereby proving the relevance of value-based funds. A recent paper published by the Research Affiliates shows that ‘value’ is the most attractive factor in terms of market adjusted return and reports of value’s death as an investment style may be greatly exaggerated.

Value funds: Attractive investment in times of rich valuations

In the current scenario, where the equity markets are highly reliant on the earnings growth expected over the next two years, and the economic parameters continue to remain insipid, value-based funds could be an attractive investment destination. Value-based funds are the perfect choice for investors who give higher weightage to downside protection. Incidentally, the Nifty 50 index is trading at 20.6 times, a 34 per cent premium to its long-term average. The historical data suggests that the Nifty peaks when trading between 18.5-19.5 times of its one-year forward price-earnings multiple, while the returns in the next twelve months turn negative. Therefore, the importance and allocation to value funds should rise amidst a huge gap between the market return and economic fundamentals.

Value funds back on investors’ radar

Between March 2020 and July 2020, value funds have received inflows of 0377 crore, while it had witnessed an outflow of 03,162 crore over five months, prior to March. The total assets under management of the value funds stood at 051,988 crore at the end of July 2020 and accounts for nearly 7 per cent of total equity AUM of industry.

Why invest in ICICI Prudential Value Discovery fund?

Among the 17 value funds offered by the mutual fund industry, the ICICI Prudential Value Discovery Fund has been able to consistently draw investors’ attention, thanks to the degree of its outperformance with the benchmark and niche element in the stock selection. This fund is the largest in terms of AUM in the value fund category and its fund size is nearly 2.5 times more than its next counterpart.

Such robust performance was made possible due to the two-pronged approach for stock selection. First, a potential company is evaluated based on financial strength, business durability and management quality. Once the company passes the first round, the fund manager examines the value the company offers based on its current valuation. Currently, the portfolio is overweight on traditional defensive sectors such as pharma, power, software and telecom.

Going forward, as the market nears the bubble zone, value funds could underperform. However, for a long-term investor, what matters is how the fund performs over the long term. Here, one can be rest assured a value fund such as ICICI Prudential Value Discovery has all the bearings to outperform the benchmark and its peers over a complete long-term market cycle.

Piyush Jain, Managing Partner, Ladco Crest Wealth LLP