“Is value investing dead?” Newspaper journalists and business channel anchors have been asking this question to their “experts” relentlessly.

To join the bandwagon, some journalists are even including Value Funds (that follow the principles of value investing) in the list of investment propositions that investors should avoid.

The data published by the Association of Mutual Funds in India (AMFI) clearly suggests that the popularity of Value Funds is dipping. Over the last 1 year, their average AUM has dropped by 3% but the category folio count has shrunk by 3.85 lakh —a 9% fall.

Table 1: Ebbing popularity of Value Funds

Month Number of folios Avg. AUM
(Rs in crore)
Sep-19 43,82,101 54,772
Dec-19 42,33,058 55,809
Mar-20 41,31,763 44,170
Jun-20 41,03,832 48,298
Sep-20 39,96,454 52,949

(Source: AMFI, PersonalFN Research)

There’s no denying that Value Funds have failed to generate attractive returns for their investors over the last 3-5 years. The 3-year category average return of Value Funds is negative. Only a handful of schemes such as UTI Value Opp Fund, ICICI Pru Value Discovery FundNippon India Value Fund, have managed to generate positive returns on a 3-year time frame, but not very encouraging (see Table 2).

Table 2: Disappointing performance of Value Funds…

Scheme Name Absolute (%) CAGR (%)
1 Year 2 Years 3 Years 5 Years 7 Years
UTI Value Opp Fund(G) 7.94 8.73 5.57 7.19 10.81
ICICI Pru Value Discovery Fund(G) 7.74 3.39 3.10 6.20 16.15
Tata Equity P/E Fund(G) 4.95 7.68 1.76 11.30 17.66
Nippon India Value Fund(G) 1.95 6.97 1.60 6.94 14.37
HDFC Capital Builder Value Fund(G) 1.54 2.04 1.38 7.79 13.87
L&T India Value Fund(G) 4.37 5.27 0.56 7.96 17.53
Quantum Long Term Equity Value Fund(G) 0.88 1.32 0.43 6.49 10.54
JM Value Fund(G) -3.95 6.02 -0.98 9.32 15.07
Indiabulls Value Fund(G) 2.40 0.25 -3.57 3.63
IDFC Sterling Value Fund(G) -0.71 -1.33 -4.13 6.19 12.92
Templeton India Value Fund(G) -4.38 -0.91 -5.23 3.96 10.44
Aditya Birla SL Pure Value Fund(G) -1.70 -4.42 -9.42 3.91 15.72
Union Value Discovery Fund(G) 6.05
IDBI Long Term Value Fund(G) 2.30 3.33
Category Average 2.10 2.95 -0.74 6.74 14.10
NIFTY 500 – TRI 3.91 7.42 4.14 8.45 12.15
S&P BSE SENSEX – TRI 4.76 10.18 9.17 9.67 11.44

Direct Plans considered
Data as of October 21, 2020
(Source: ACE MF, PersonalFN Research) 

Only on the 7-year time period the returns clocked by certain Value Funds are somewhat encouraging.

The real question one should ask is —has value investing failed or, the problem in quality has overshadowed value investing?

Let’s understand what led to the underperformance of Value Funds…

Markets witnessed a broad-based sell-off from February 2018 onwards. As a result, many value companies gave up most of their valuation premium and soon started quoting attractive valuations. Since then only a few stocks have driven the markets up, as revealed by the noticeable outperformance of S&P BSE Sensex over the Nifty 500 on a 3-year timeframe.

The Indian economy that grew at a good-looking 8.2% in FY16 has lost the momentum. Demonetization and GST delivered the back-to-back blows to India’s economic growth which tanked to 4.2% in FY20, and in Q1FY21 India’s GDP contracted by -23.9% (the worst in four decades as a result of the COVID-19 pandemic). Trade tensions between the U.S. and China affected the global trade volumes, causing troubles for India’s exports. And now various estimates suggest that the Indian economy is likely to contract 7.5% to 10% in FY21.

Value Funds by and large, unfortunately, were banking predominantly on cyclical companies between FY17 and FY20 assuming that the negative impact of demonetization and GST implementation on the growth momentum would be transient. Besides, the Securities and Exchange Board of India (SEBI)’s definition of small-caps (according to mutual fund categorization and rationalization norms), did not appeal mutual funds much. Smaller companies became unpopular at the onset of 2018. In FY20 there were hopes of a sharp revival, and now, in FY21 the COVID-19 pandemic has upset calculations of most fund managers. These are the primary reasons for the massive underperformance of the category of Value Funds.

What to expect?

Clocking high economic growth is getting a challenge amid the unprecedented pandemic situation that we are facing today. As the U.S. is going into the election mode, markets across the globe are likely to witness some volatility. If markets fail to hold up their current level and correction sets in, the overvalued stocks might lose substantial ground.

[Read: Why a Market Crash May Be an Opportune Time to Look At Value Funds]

Valuations across market segments appear, out of the comfort zone, and given the uncertainty looming the overall downside risk seems high; the margin of safety has narrowed. For several companies, the effects will be seen on the earnings and the recovery will be slow and painful for mid and small-cap companies.

So, is value investing dead?

Calling value investing dead is synonymous to doubting the tenets of some legendary investors such as Warrant Buffet, Benjamin Graham and Charlie Munger to name a few.

Value investing isn’t dead perhaps the perception of value has changed substantially.

When you add a Value Fund to the investment portfolio, here’s how to intelligently do it…

Instead of investing in Value Funds randomly, adopt a time-tested approach of ‘Core and Satellite’ investing, a strategy followed by some of the most successful equity investors.

The ‘Core’ component should comprise of long term holdings that give stability to your portfolio, whereas the term ‘Satellite’ applies to the strategic portion that would help you accelerate returns across market conditions. Additionally, the ‘Satellite’ portfolio provides the opportunity to support the ‘Core’ by taking active calls based on extensive research.

In short, your ‘Core’ portfolio should include a large-cap fund, multi-cap fund and value style fund. Whereas, the ‘Satellite’ part of the portfolio –a smaller portion — should include a mid-cap fund, large & mid-cap fund and an aggressive hybrid fund.

This article first appeared on PersonalFN here

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