The equity markets have soared to all-time highs even as the pandemic continues to ravage the economy. Though there is improvement in business and consumer sentiments ever since the economy started to unlock after months of strict lockdown, it could be a while before a total recovery sets in.

Notably, there are various stocks/sectors that have been severely impacted as a result of the pandemic. Over time these stocks/sectors are likely to overcome hurdles and payoff its investors well for their patience.

Value funds seek to identify such undervalued stocks in various sectors, i.e. the stocks currently trading lower than its intrinsic/fair value, but with strong fundamentals and high growth potential.

Value funds tend to underperform during momentum based market rallies that generally favour growth stocks. But when the market realises true potential of value stocks, its prices soar and investors are rewarded with attractive gains.

DSP Value Fund is the latest fund that will follow the value-investing principle. The scheme aims to offer diversification from expensive growth companies and focus on investing in companies that are reasonably priced, based on fundamental characteristics.

Being a value fund, DSP Value Fund will deploy a minimum 65% of its assets in equity & equity related instruments following a value investment strategy. Valuations will be reckoned considering fundamental factors such as price-to-book ratios, returns on equity, and long term sectoral trends.

DSP Value Fund is launched with the objective of generating consistent returns by investing in equity and equity related or fixed income securities, which are currently undervalued. However, there is no assurance or guarantee that the investment objective of the scheme will be achieved.

Table 1: Details of DSP Value Fund

Type An open ended equity scheme following a value investment strategy Category Value Fund
Investment Objective To generate consistent returns by investing in equity and equity related or fixed income securities which are currently undervalued. However, there can be no assurance that the investment objective of the Scheme will be achieved.
Min. Investment Rs 500 and any amount thereafter Face Value Rs 10/- per unit
  • Direct
  • Regular
  • Growth
  • Dividend
Entry Load Not Applicable Exit Load – An Exit Load of 1% is payable if Units are redeemed / switched-out upto 1 year from the date of allotment;
– Nil if Units are redeemed / switched-out after 1 year from the date of allotment
Fund Manager – Mr M Suryanarayanan (Equity Portion)
– Mr Jay Kothari (Dedicated Fund Manager for Overseas Investments)
Benchmark Index Nifty 500 Value 50 (Total Returns Index)
Issue Opens November 20, 2020 Issue Closes: December 04, 2020

(Source: Scheme Information Document)

Investment strategy – DSP Value Fund

Given the current low interest rate scenario stocks have reached high valuations. Therefore, DSP Value Fund will aim to apply disciplined rules to identify good companies at reasonable prices (valuations). The fund will accumulate a portfolio of stocks available at a discount to its intrinsic value through a process of Discovery.

The Discovery Process would help in identification of such stocks, which have attractive valuations in relation to earnings or book value or current and/or future dividends and are available at a price, which can be termed as a bargain. This may constitute stocks that have depreciated for a short period due to some exceptional circumstances or due to market correction phase or due to lack of interest in investing in a sector which has significantly underperformed the market.

DSP Value Fund’s asset allocation pattern will be as under:

Table 2: Asset Allocation of DSP Value Fund

Instruments Indicative Allocation (% of assets) Risk Profile
Minimum Maximum High/Medium/Low
Equity and Equity related instruments including derivatives* 65 100 Medium to High
Debt, Securitized debt# and money market instruments 0 35 Low
Units issued by REITs & InvITs 0 10 Medium to High

*The scheme may invest up to 35% of its assets in foreign securities
#Exposure to securitized debt will not exceed 10% of the net assets of the scheme

(Source: Scheme Information Document)

The fund will invest up to 35% of its assets in international companies to benefit from their innovation & expertise. This strategy can also help reduce overall portfolio volatility (as against owning only Indian companies). When markets reach extreme highs, the fund will maintain higher cash balances to help reduce downside risk, which will be reinvested when prices turn reasonable again.

Who will manage DSP Value Fund?

The equity portion of DSP Value Fund will be managed by Mr M Suryanarayanan; while Mr Jay Kothari will be the dedicated manger for overseas investment of the fund.

M Suryanarayanan joined DSP Investment Managers in July 2011 as a member of the Product Management Group. Currently, he is Vice President and analyst with the Equity Investments team. He is also Fund Manager for DSP A.C.E. Fund (Analyst’s Conviction Equalized) – Series 1 and DSP A.C.E. Fund (Analyst’s Conviction Equalized) – Series 2, and Co-Fund Manager for DSP 3 Years Close Ended Equity Fund (Maturity Date January 4, 2021)DSP Arbitrage Fund.

Before joining DSPIM, he was part of the Product team of the Private Wealth Management vertical of Anand Rathi Financial Services Ltd. Suryanarayanan is a Mechanical Engineering graduate and has completed his Post Graduate Program (PGP) in Management from IIM, Ahmedabad as well as a CFA Charterholder.

Jay Kothari is Senior Vice President, Lead Investment Strategist & Head – International Business with DSP Investment Managers. Kothari joined the firm as a member of the Sales team (Banking) in May 2005 and has been with the Investment function since January 2011. Prior to joining DSPIM, Kothari worked for Standard Chartered Bank for a year in the Priority Banking division. He completed his Bachelor of Management Studies (Finance & International Finance) from Mumbai University, followed by an MBA in Finance from Mumbai University.

Kothari is currently the Dedicated Fund Manager for overseas investments for various schemes of DSP Mutual Fund including DSP Small Cap FundDSP Mid Cap Fund, and DSP Equity Opportunities Fund.

Fund outlook – DSP Value Fund

Since value funds invest in undervalued stocks, it could be a while before the market discovers its true potential which would then subsequently reflect in its price. Value funds could therefore go through a prolonged phase of underperformance or performance deviations from benchmarks or other funds.

At some point stocks trading at high valuations may begin to slip, but strong businesses helmed by a well-built management team available at attractive valuations might hold firm thanks to a better margin of safety. In such a scenario, value funds can be a good portfolio diversifier.

Being a value-oriented fund, the scheme’s performance will depend on the ability of the fund manager to spot the growth potential of undervalued/out of favour stocks in different sectors/market capitalisation at an early stage and to hold on to it until its full potential is realized. It will also depend on the fund’s ability to manage risk through adequate diversification while focusing on quality at sensible price.

Value investing demands temperament and patience. Thus, DSP Value Fund is strictly for pure long term investors who can stick to these principles through market ups and downs.

This article first appeared on PersonalFN here

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