“All intelligent investing is value investing — acquiring more than you are paying for. You must value the business in order to value the stock.” – Charlie Munger
Value investing is a strategy of mutual funds that aims to invest in stocks of high quality companies that are trading below their estimated intrinsic value due to temporary unfavorable market conditions. This strategy offers investors an opportunity to benefit from the growth potential of high-quality stocks across market capitalization/sectors trading at discounted price and holding them until their full potential is realized in time.
The underperformance of value funds in comparison to growth funds over the past few years has raised concerns about the strategy’s success. However, in the last one year, value funds have delivered stable returns, and several indicators suggest that the long-term value fund downturn is coming to an end.
The value investing strategy outperforms in periods of strong economic growth. Although the second wave of COVID-19 has slowed down economic recovery, the government stimulus checks and infrastructure efforts, measures to improve credit flow in the market and the ambitious vaccination drives to stop the spread of virus could enable faster economic revival.
ITI Mutual Fund has entered into the value fund category with launch of ITI Value Fund; it is an open-ended equity scheme following a value investment strategy.
On the launch of this fund, Mr George Heber Joseph CEO and CIO of ITI Mutual Fund said, “The fund house since its inception has been offering unique investment experience to its investors. With Value Fund, we aim to generate long term capital appreciation by identifying undervalued stocks which have the potential to offer superior risk-adjusted returns in the long term on a consistent basis.”
Table 1: Details of ITI Value Fund
|An open-ended equity scheme following a value investment strategy.
|The investment objective of the scheme is to seek to generate long-term capital appreciation by investing substantially in a portfolio of equity and equity related instruments by following value investing strategy. However, there can be no assurance that the investment objective of the scheme would be achieved.
|Rs 5000/- and in multiples of Re 1 thereafter. Additional purchase Rs 1000/- and in multiples of Re 1 thereafter.
|Rs 10/- per unit
|Nifty 500Value 50 TRI
|May 25, 2021
|June 08, 2021
(Source: Scheme Information Document)
What will the Investment Strategy for ITI Value Fund be?
ITI Value Fund will be predominantly investing in a portfolio of equity and equity related instruments to achieve its investment objective of long-term capital appreciation by following the value investing strategy.
This scheme will aim to invest in a diversified portfolio of companies that are selected using attributes of value investing. The Scheme would seek to identify undervalued securities having the potential to deliver superior returns over the long term.
It would include stocks the Fund Managers believe are trading at less than their assessed intrinsic values but have high growth potential. The identification of undervalued stocks would involve fundamental analysis and it will be based on the evaluation of various factors, including but not limited to stock valuation, financial strength, cash flows, company’s competitive advantage, business prospects, and earnings potential.
The scheme may also constitute stocks that have depreciated for a short period due to some exceptional circumstance or due to market correction phase or due to lack of interest in investing in a sector, which has significantly underperformed the market. These stocks hold an intrinsic value because of their business models and show potential for smart growth in the future.
Thus, the portfolio of this scheme will be built using a bottom-up approach that focuses on appreciation potential of individual stocks from a fundamental perspective.
This scheme apart from investing 65% of its assets in equity & equity related instruments including derivatives, it will also invest a maximum of 10% in preference shares, up to 35% in debt and money market instruments and up to 10% in units issued by REITs and InvITs.
Under normal circumstances, asset allocation will be as under:
Table 2: Asset Allocation of ITI Value Fund
|Indicative Allocation (% of net assets)
|Equity & Equity related instruments including derivatives
|Medium to High
|Debt and Money Market Instruments
|Low to Medium
|Units issued by REITs and InvITs
|Medium to High
(Source: Scheme Information Document)
Who will manage ITI Value Fund?
Mr Pradeep Gokhale and Mr Rohan Korde will be the dedicated fund managers for this scheme.
Mr Pradeep Gokhale is Senior Fund Manager and Head of Research at ITI Asset Management Ltd and has over 24 years of work experience in Fund Management, Equity Research and Credit Evaluation & ratings. Prior to this, he was associated with Tata Asset Management Ltd. as Senior Fund Manager – Equities (Key Management Personnel), CARE Ratings Ltd as Head of Financial Sector and Securitisation Ratings and has even worked in corporate finance departments of companies like Bombay Dyeing, Tata International and Lubrizol India Ltd.
Mr Gokhale’s qualifications include a Bachelor of Commerce, CA, and CFA. Currently the other schemes he manages are ITI Multi Cap Fund, ITI Long Term Equity Fund, ITI Balanced Advantage Fund, ITI Small Cap Fund, ITI Large Cap Fund, and ITI Mid Cap Fund.
Mr Rohan Korde is Fund Manager at ITI Asset Management Ltd and has over 17 years of work experience in capital markets. Prior to this, he was working with BOB Capital Markets as Vice President Research, Prabhudas Lilladher as Vice President Research, and Anand Rathi Share & Stock Brokers as Vice President Research.
Mr Rohan has Masters in Management Studies (Finance) and Bachelor of Commerce. He is currently not managing any other schemes.
Fund Outlook – ITI Value Fund
This scheme will be practicing value investing to allocate its assets and to achieve long-term capital appreciation. This strategy invests in low-value stocks of high quality companies with attractive valuations across market capitalization and across sectors.
This fund will focus on the SQL investment philosophy, which aims to maintain margin of safety, quality of business and lower leverage. It offers investors a better diversification and access to invest in high quality companies at lower cost. In addition to this, it follows price investment strategies with a bottom-up approach for stock selection.
The stocks selection process will be carried out by identifying the growth drivers of the company and this scheme will also use the top-down approach for sector allocation. It will identify such themes and sectors that are emerging in the market and it will benefit from innovation and economic direction at a new level.
With the value based approach towards investing, this fund will identify undervalued securities that have a potential to generate superior risk-adjusted returns in the long run. However, do note that the fund manager’s ability to select the undervalued stocks with growth potential plays an important role and the fund’sperformance depends on this factor.
ITI Value Fund is suitable for investors seeking long-term returns by following value based investing strategy. Ensure you have a long investment horizon because value funds could undergo a phase of underperformance in the short to medium term compared to its benchmark and other funds. Basically, you must have a high-risk tolerance to bear market volatility.
This article first appeared on PersonalFN here