"Value investing can never be dead"

By Jimmy Patel

The value Investing theme has not been able to generate value or build wealth for investors effectively, particularly over the last few months.

In the current corrective phase caused by the COVID-19 crisis, most value funds have eroded wealth, posting double-digit negative returns, reveals the Value Research data. Even the one-year data is nothing to vie for––most schemes delivered double-digit negative returns.

Over three years as well, the compounded annualised returns clocked by most value funds are negative, while only a handful of schemes managed to deliver positive returns. A number of schemes in the value fund category failed to outperform their respective benchmark index.

In a five-year period, the returns from some value funds are close to what one would earn on a bank fixed deposit; it is even lower for a few others.

Those who started SIPs for 3-year or 5-year period have been left disappointed. The SIP returns are negative, which means investors have lost their principal amount.

As a result, investors too have been pulling out money from value funds.

Table 1: Net inflow/Outflow of Value Funds

	Dec-19	Jan-2020	Feb-2020	Mar-2020	April-2020	May-2020
Value Fund/Contra Fund	-818	-739	-421	828	141	93

Data as of May 2020; (Source: AMFI)

This brings us to question: Has Value Investing reached a dead-end?
The straight answer to that is, ‘No’. Value Investing is for the long-term. It would be premature and imprudent to judge ‘Value’ over the short-term.

In the short-term and near-term, the equity markets might not reflect the real fundamentals but may merely move on sentiments, exuberance and liquidity. That’s why Benjamin Graham, the father of Value Investing, has said, “In the short run, the market is a voting machine, but in the long run it is a weighing machine.”

On Dalal Street, the term value Investing is commonly used, but not all individuals follow it in the true nature and spirit. It is very common for investors to look at the ‘price’ rather than the ‘value’ the stock commands.

Discovering the true worth of a stock is important (rather than chasing it merely because it is available cheap). After all, the stocks in the underlying portfolio should be able to truly discover the value for investors. And ‘value investing’ finds its place in the reflective quote, “Beauty lies in the eyes of the beholder” by the Greek philosopher, Plato.

For value investing, the fund manager of a value fund could consider investing in valuable large caps, as well as discover value-buying opportunities in the mid cap and small cap space that hold the potential to become multi-baggers and enter the large cap space one day.

The exposure to mid- and small-cap could make them look vulnerable to the corrective and/or bear phase of the Indian equity market. But over the long-term, value investing works!

In fact, Value Investing is meant for the long-term, it is not for the sprint runner but marathoners.

Table 2: The Value-buying Opportunity

Particulars	S&P BSE SENSEX	S&P BSE Mid-Cap	S&P BSE Small-Cap
All-time high (Dates)	20-Jan-2020	09-Jan-2018	15-Jan-2018
All-time high level (in points)	42,273.87	18,321.37	20,183.45

Level as of Dec 31, 2019 (in points)	41,253.74	14,967.83	13,699.37
Level as of June 29, 2020 (in points)	34,961.52	13,073.72	12,474.44

YTD Return (%)	-15.3%	-12.7%	-8.9%
Correction since the all-time high (%)	-17.3%	-28.6%	-38.2%

Data as of June 29, 2020
(Source: bseindia.com, PersonalFN Research)

The current correction we have witnessed in equity markets caused by the COVID-19 crisis offers a good value-buying opportunity. Valuation-wise, the markets seem attractively placed with a decent margin of safety. On Price-to-Equity (P/E), Price-to-Book Value (P/BV), the net-worth, Return on Equity (RoE), Return on Capital Employed (RoCE), the operating leverage, the debt-to-equity, dividend payout, dividend yield, among many other parameters; certain companies––across the market capitalisation segments––are valuable placed.

This will prove advantageous for fund managers in the portfolio construction activity. No doubt the market would remain volatile given the uncertainty surrounding the world at present, but one can still profit from it in the long run. Value funds would stage a comeback.

Having said that, choosing a value fund based on a host of quantitative and qualitative parameters is important. Plus, understanding the investment philosophy, process and systems at the fund house helps.

At Quantum Mutual Fund, the principles of Value Investing are firmly adhered to in the construction of the equity portfolio. The fund house defines Value Investing as:

“An investment strategy where stocks are selected that trade for less than their intrinsic values. Value investors actively seek stocks they believe the market has undervalued. Investors who use this strategy believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with a company's long-term fundamentals, giving an opportunity to profit when the price is deflated.”

The above definition is crystallised in the investment process, honed over decades of experience.

Here’s broadly the investment process followed:

The fund house first understands the business of the company and the environment in which it operates. Based on that, the evaluation of the management of the company and their long-term goals is done.
The stock price of the company is analysed based on fundamentals relative to its sector, its historical performance, and overall market trends.
For a company’s stock entering the portfolio for the first time, the current price should be 40% or less than the fund house’s estimate of long-term value.
And the company’s stock exits the portfolio (completely or partially) if the current market price is greater than the fund house’s estimate of long-term value. The fund house may also reduce the exposure to a stock in case there is a change in the view of management or the business.

A bottom-up stock selection approach is applied to minimise the risk, and Quantum Mutual Fund follows disciplined, exhaustive research.

It is this approach that usually helps investors to outperform on the upside and limit the downside. That being said, market liquidity is an important tool to mitigate investment risk.

Suitability of a Value Fund:

On the risk-return spectrum, a value fund is placed relatively high––between focused funds and dividend yield funds. As the fund manager of a value fund invests in undervalued stocks, some of their bets may not pay-off immediately (in the short-term and medium).

Graph: Positioning of a Value Fund on the risk-return spectrum

Note: For illustrative purpose only
(Source: PersonalFN Research)

Consider a value fund if you have an investment time horizon of at least seven years and stomach for moderately high-to-high risk. A value fund is not for the faint-hearted.

And keep in mind, value Investing can never be dead; as a concept and strategy, it is immortal.

(Jimmy Patel is the MD & CEO, Quantum AMC.)