Value funds shine amid broad-based rally as 'growth' trade fizzles out

Data from MF Explorer shows that maximum return generated by value funds the past one year is 96% and average is 59%

A broad-based rally in the Indian equity markets have helped value-focused funds deliver superior returns in the last one year. Value funds were out of favour as investors piled on to ‘growth’ stocks even at lofty valuations in the pre-pandemic world, leading to sharp polarisation in the stock market returns.

But in the last one year, value funds have started delivering returns as investors have shifted their stocks away from growth stocks to ones that are available at attractive valuations.

Mutual fund (MF) industry players believe that even now there is enough value in the market.

“We believe value is in the early stages of playing catch-up with growth and quality which has significantly rallied over the past few years. Also, several stocks public sector undertakings (PSUs) and others which have been beaten down names over the past several years, have caught investor attention due to their deep value have started rallying. All of this put together, has helped value funds gain traction,” said S Naren, ED & CIO, ICICI Prudential AMC.

The data from MF Explorer shows that maximum returns generated by the value funds in the last one year is 96 per cent and average returns is 59 per cent.

Value investing is largely investments in stocks that are undervalued and possibly ignored by investors but have room for appreciation in future. However, investing through value style differs from one fund house to another.

In ICICI Prudential Value Discovery Fund the portfolio consists of stocks which have the potential for reasonable upside but are currently available at a discount to its fair/intrinsic value. While Quantum Long Term Equity Value follows a bottom-portfolio construction process. Their approach to investing is based on the principles of long-term value, detailed and an extremely disciplined process.

“Value fund like ours perform well when risk is adequately priced. In a macro setting where there is broad based economic recovery and normal interest rate environment, the equity returns are driven by earnings upgrade cycles and not just liquidity (flows). In such an environment, stocks react to fundamental triggers and value funds tend to do better,” said Sorbh Gupta, Fund Manager- Equity at Quantum AMC.

In the past one year, ICICI Prudential Value Discovery Fund and Quantum Long Term Equity Value Fund have given returns of 61.2 per cent and 56 per cent, respectively.

According to the market participants, in the stock market, value typically tends to emerge when investors fail to pay attention to positives for a long time, which invariably over time leads to strengthening of a case for a stock or sector. A long period of negativity creates the right conditions for a sector or stock to outperform.

Despite Sensex gaining by 43 per cent in the last one year and fund managers believe even today there are many sectors where valuations are attractive.

“We believe most of the cyclical sectors represent good value till the central banks tighten monetary policy. Within defensive sectors, pharma and IT represent relatively better value compared to consumer sectors,” added Naren.