Are the good times back for value funds?

After a prolonged stint in the dark, value funds are seeing some light at the end of the tunnel. Amid a broader market uptick, value funds have raced ahead of most other fund categories. However, does this really signal the start of a comeback for the value strategy?Endless waitFor many investors who have persisted with value funds for the past few years, the wait for decent returns has been unending. Even before the pandemic-led sell-off earlier this year, value funds barely had anything to offer. Markets had for long gravitated towards so-called growth stocks—names exhibiting higher earnings growth trajectory or ‘quality of earnings’. Meanwhile, value stocks were relegated to the sidelines. For the 5 year period ending 20 January 2020, the value funds category yielded -7% annualised returns even as multi-cap funds clocked 8-10%. The perceived value in some of these names remained unrealised. The market rout in March-April only seemed to push back the timeline for recovery.If you have been invested in a value fund for the past 5-odd years without any result, the recent uptick will provide some succour. Since the March lows, the value category has delivered 31% even as multicap funds have yielded 29% over the same period. Most investing strategies tend to perform in cycles and returns eventually tend to revert to mean. By this logic, the value strategy is due for outperformance.“The historical pattern is that when the market rises from cheap valuation territory, funds with a value strategy tend to do better. This was the pattern in 2009 and 2013,” points out Vetri Subramaniam, Group President and Head of Equity, UTI AMC. Between November 2008 and November 2009, MSCI India Value Index jumped 116% while MSCI India Growth gained 110%. Similarly, a year on from the ‘taper tantrum’—August 2013 to August 2014—the MSCI India Value index soared 41% relative to 35% gain in the MSCI India Growth index.Turnaround for patient investorsValue funds have outperformed market-cap oriented funds in past 3 months.76355705Data as on 8 June. Source: Value Research.Fund managers insist history will repeat itself—the value theme is expected to recover and perform better than the growth theme in the coming months. Mrinal Singh, Deputy CIO – Equity, ICICI Prudential AMC, who manages the ICICI Prudential Value Discovery Fund, says, “True value investors typically walk into such a phase with a baggage of underperformance but at the end of it come out with flying colours.” This is largely because they would have invested in a set of businesses which provide sufficient margin of safety. In 2014, when the broader market was up 39%, ICICI Prudential Value Discovery delivered 74%. Similarly, in 2009 when the market soared 88%, the fund clocked 129%.Analysts contend that the entire spike in the value theme may play out in the coming 6-12 months. This is inherent to the return profile of value strategy. It tends to lie low for long but once value gets unlocked, investors benefit from exponential gains in a short span of time. “The nature of returns from value strategy is far lumpier than any other investing style. It can languish for long and then witness sudden bursts of return,” points out Ankur Maheshwari, CEO, Wealth Management, Equirus Capital. Usually, turnaround in a select few deep-value pockets contributes to this uptick. The current outperformance can be attributed to a bounce in undervalued sectors like telecom and healthcare.Light at end of tunnelExperts have long maintained that the strength of a value-driven fund lies more in its ability to protect the downside better during a market decline. Across market cycles, this superior downside protection allows the fund to deliver healthy return. But this requires the investors to remain patient and stay invested for the duration when returns seem elusive. The current bounce, even if short-lived, is a testament to the potential in this category. “We do not see value strategy as a temporary phenomenon,” avers Singh. “The foundation of value as a strategy is very deep and strong. Every investment style has its strength and weakness and so does value. It is because of this it is often said that performance should be evaluated over a complete market cycle,” he insists.“We suggest that investors should think of value and growth as an allocation tool for diversification rather than as a mere market timing device. Our experience is that funds with an intrinsic value strategy can perform well over an entire market cycle,” says Subramaniam.The problem with this strategy is that value can often be misleading to the untrained eye. Cheap valuation does not necessarily imply potential for value unlocking. It can easily turn out to be a value trap. For instance, the cheap valuation of several public sector banks has given an illusion of value for many years. Experts maintain investors should dig in as value still has a lot of catching up left.Even if it doesn’t come to pass immediately, Maheshwari insists investors who have waited for long should give it some more time. “It simply doesn’t make sense to exit now. When it does play out, the alpha creation in value strategy will be quick and far greater than in any growthoriented fund,” he asserts.Click here to download ET Online’s guide to everything personal finance in the times of Covid-19

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