The Indian equity markets have witnessed massive selloff in the last few days. Persistent selling has been due to fears of global recession as coronavirus continues to spread rapidly, taking the markets to its retrograde point from 3 years ago.

Some experts believe that the impact of coronavirus on the economy could be even worse than the global financial crisis of 2008.

Amid these concerns, I believe that the current market scenario provides an excellent opportunity for value fund managers to pick quality stocks across market capitalisation.

It is well known that value funds have witnessed prolonged underperformance due to expensive market and weak corporate earnings, which favoured growth stocks. But in the current market crash, value funds may provide a better margin of safety and act as a good portfolio diversifier because growth stocks too have come under pressure.

ICICI Pru Value Discovey Fund (IPVDF) is one such true to style value fund that was launched in August 2004. It is managed by Mr Mrinal Singh since February 2011.

Graph 1: Growth of Rs 10,000 if invested in ICICI Pru Value Discovery Fund 5 years ago

Graph 1: Growth of Rs 10,000 if invested in ICICI Pru Value Discovery Fund 5 years ago

Data as on March 18, 2020
(Source: ACE MF)

IPVDF rewarded its investors well in the past with superior returns. However, its poor returns over the past few years have plunged its 5-year compounded growth rate into a negative territory. Notably, most value funds have underperformed during this period due to weak corporate earnings. If you had invested Rs 10,000 in IPVDF five years back on March 18, 2015, its value would have dropped to Rs 9,404 now, while a simultaneous investment in S&P BSE 500 – TRI would now be valued at Rs 10,469.

Table: ICICI Pru Value Discovery Fund’s performance vis-a-vis category peers

Scheme Name Corpus (Cr.) 1 Year (%) 2 Year (%) 3 Year (%) 5 Year (%) 7 Year (%) Std Dev Sharpe
Tata Equity P/E Fund 4,567 1.50 2.11 12.09 13.12 16.15 15.07 -0.03
JM Value Fund 116 5.73 2.12 11.93 13.20 14.75 16.14 0.01
Nippon India Value Fund 2,948 3.72 3.32 10.99 11.01 13.13 16.69 0.01
HDFC Capital Builder Value Fund 4,010 -0.88 2.79 10.74 10.95 13.87 15.44 -0.04
IDFC Sterling Value Fund 2,984 -6.62 -2.76 10.05 10.50 13.17 18.70 -0.03
UTI Value Opp Fund 4,403 5.03 5.67 9.64 7.60 11.40 13.57 0.02
L&T India Value Fund 7,041 0.89 -0.01 9.63 13.50 17.48 16.01 -0.04
Templeton India Value Fund 439 -3.76 -2.64 6.96 8.31 10.09 16.83 -0.11
Quantum Long Term Equity Value Fund 787 0.27 1.88 6.88 8.44 12.49 12.69 -0.15
ICICI Pru Value Discovery Fund 13,446 -0.54 1.65 6.42 9.40 14.51 12.83 -0.12
S&P BSE 500 – TRI 4.76 5.32 11.54 9.86 12.37 14.63 0.01

Returns are on a rolling basis and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on March 18, 2020
(Source: ACE MF)

*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

IPVDF underperformed S&P BSE 500 – TRI index across 1-year, 2-year, and 3-year rolling return basis, though it outperformed the category average on 2-year and 3-year rolling return basis.

Over the longer time horizon of a 5-year rolling period, it delivered returns nearly in line with the index while on a 7-year rolling period it outperformed the index by over 2 percentage points.

In terms of risk-return parameters, IPVDF registered lower volatility as compared to S&P BSE 500 – TRI index as well as the category average. However, its risk-adjusted returns as denoted by Sharpe were lower than the index and many category peers.

Investment strategy

Classified as value fund, IPVDF is mandated to invest at least 65% of its assets in equity and equity related instruments following the value-style approach. The fund strictly sticks to its investment mandate and prefers to stay fully invested in equities. It has the flexibility to invest across market capitalisation. However, the fund maintains a large cap bias along with a significant exposure to mid caps. The fund adopts a “Bottom-up” strategy to identify and select undervalued stocks based on an evaluation of several parameters such as earnings, asset value, free cash flow, dividend yield, management quality, business competitiveness, etc.

Graph 2: Top portfolio holdings in ICICI Pru Value Discovery Fund

Holding (in %) as on February 29, 2020
(Source: ACE MF)

IPVDF holds a fairly-diversified portfolio of stocks and sectors. As on February 29, 2020, the fund held 44 stocks in its portfolio with the top 10 stocks accounting for around 53.7% of its assets. Infosys has the highest stock allocation, while it has prominent holdings in Sun Pharma, Bharti Airtel, NTPC, and Mahindra & Mahindra. Notably, the top 10 stocks include a healthy mix of various sectors.

Bharti Airtel and PI Industries were the major contributors to the fund’s gain in the last one year, though it lost significant value from its holdings in Sun Pharma, ITC, Mahindra & Mahindra, Indian Oil Corp, Wipro, Exide Industries, among others.

In terms of sectors, the fund has the highest exposure to Infotech were it has allocated 18.4% of its portfolio. Pharma, Power, Telecom, Auto, Transportation, Finance and Consumption are the other major sectoral holdings.

Suitability of ICICI Pru Value Discovery Fund

IPVDF has a track-record of identifying discounted sectors and picking quality undervalued stocks which may turn out to be rewarding in the long run. The fund has delivered superior returns in the past at a reasonable level of risk. Though the fund maintains a fairly diversified portfolio, it takes time for undervalued stocks to be discovered by the market.

Hence, certain bets of the fund may not pay off immediately and the scheme may witness bouts of short-term underperformance. This makes IPVDF suitable for investors with high risk appetite and an investment horizon of at least 5 years.

Note:   This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

This article first appeared on PersonalFN here

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