All-weather assets

63-Madhusudhan-P-Gad Madhusudhan P. Gad

EQUITY MARKETS across the globe have turned volatile over the past few months and the situation in India is no different. This is bound to cause some amount of nervousness among investors. There are rising concerns whether one should invest in such a situation. Sitting on the sidelines perennially for a sharp correction cannot be an ideal approach, though; for longterm investors, time spent in the market is more important than timing the market.

At a time when equity valuations appear to be stretched, it is generally perceived that there are no opportunities for value investing. This, however, is far from the truth. History shows that there is always an opportunity for value investment in any market condition. This is because there are always some sectors/stocks that may have fallen off the investor radar but is fundamentally strong.

What is value investing?

Value investing is an investment approach that looks at investing in stocks which are trading at a price that is lesser than their intrinsic value. The fall in stock price could be triggered by various factors—from overreaction to bad news, causing the price to slip to a level that is not in sync with the company’s longterm fundamentals and future prospects. A savvy investor who is confident about the longterm prospects of such a company will see such corrections as an opportunity for investment at attractive valuations.

Is value making a comeback?

Just like the 1988-89 and 2007-2008 phases, value was out of favour until September 2020. Post the recent rally, investors are increasingly looking for pockets where the valuation remains reasonable. This means looking beyond new-age companies that were in vogue. So it is no surprise that opportunities in old-economy sectors such as metals, energy and power are increasingly being considered for fresh investment. This is because, in the previous rally, these sectors were relatively untouched and hence valuation continues to remain reasonable. As a result, value investing has come into focus once again. As the economy recovers slowly but steadily, these sectors are bound to gain traction.

Historically, a moderate amount of inflation has proven to be good for corporate earnings. With an assumption that current inflationary environment will not spiral out of control, corporate earnings are likely to be largely steady. On an overall basis, since the near-term outlook remains uncertain in terms of equity market, it is time to opt for pockets that offer value over growth.

Also, if you are an investor with a longterm investment horizon, value-oriented schemes tend to perform well over longer timeframes. However, in this journey, there will be sharp ups and downs. So investors need to be patient when embarking on a value investing journey. Hence, it is advisable to invest in value schemes through SIP (systematic investment plan) or STP (systematic transfer plan).

Value funds

As per SEBI categorisation, there is a separate category called value funds within the equity mutual fund offering. These funds make investments solely based on the value theme. While there are several offerings in this category, there are very few funds with a longterm track record. Among these, the ICICI Prudential Value Discovery Fund is one of the most popular funds. The fund has a track record of more than 15 years and has been the leader of the pack when it comes to performance. Over the past 18 years, the fund has delivered a compound annual growth rate of 20.1 per cent. In the past one year, the fund has delivered returns to the tune of 28 per cent, which makes it one of the top category performers. Veteran value investor S. Naren is the fund manager of the offering. So, it is no surprise that the fund has managed to weather various markets conditions very efficiently.

The writer is financial freedom coach, Fortuna Conect