Value and contra funds disappoint investors, fail to beat benchmark returns

Mutual fund (MF) investors who have made allocations to value and contra funds are yet to see meaningful outperformance on their investments. According to data from Value Research, 13 of 15 such schemes have failed to beat the benchmark returns over a three-year period.

Industry experts say the value calls may take more time to play out, given certain sectors are facing structural challenges rather than short-term issues. “With some sectors going through long-term structural issues, some schemes may have got stuck with value-traps. Value and contra funds typically look for tactical opportunities in companies where concerns are more short-term in nature,” said Vidya Bala, independent MF expert. 

According to the data cited above, the share of underperforming schemes in value funds is significantly higher than those in the mid- and small-cap categories. 

In the small-cap category, half of the schemes have underperformed the BSE Small Cap Select Total Return Index (TRI), while one-third of schemes have underperformed the benchmark in the mid-cap space. The level of underperformance stands at 87 per cent in the case of value-oriented schemes, which are benchmarked against the BSE500 TRI. 

Market observers also attribute the underperformance of value and contra funds to the polarised market conditions. “We have seen flows concentrated towards a set of quality names, which have seen their valuations get even more expensive. There has been a flight towards safety, hence market flows have been chasing these names,” said Kaustubh Belapurkar, director of fund research at Morningstar India.

Given that value funds typically look to generate outperformance by investing in under-discovered names, they may have had their allocations in such frontline stocks at the lower range, Belapurkar added. 

Since October last year, five companies — Tata Consultancy Services, Reliance Industries, HDFC Bank, Infosys, and Bajaj Finance — have accounted for 60 per cent of market cap gains of the BSE. These companies alone added Rs 4.8 trillion of market cap during this period. 

The benchmark Nifty — which consists of 50 blue-chip stocks — is trading at a price-to-earnings multiple of 16.6 times, which is at a 7 per cent premium to its long-term average.

Investment advisors also say that large allocations towards value funds could be risky, because funds have also shown long periods of underperformance in the past. 

Experts, however, said that investors may still want to maintain a small allocation towards value-oriented schemes, as they have shown periods of sharp outperformance in the past once market sentiment has improved. 

“There could be periods when value bets take a long time to play out. Sometimes, these stocks continue to trade at depressed values, with not much movement in price. However, in the current scenario, some of these bets have lost additional value as the overall economic picture has turned bleak. However, if investors are patient, such strategies can give good rewards,” said a fund manager who did not wish to be named.