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Do not worry about value category not doing well in the short-term, says Kaustubh Belapurkar, Morningstar Investment

Value-oriented funds is the third worst performer in the last one year. The category is the worst hit in the five year time period.

, ET Online|
Updated: Sep 05, 2019, 12.03 PM IST
Kaustubh Belapurkar, Morningstar-1200
Value-oriented funds is the third worst performer in the last one year. The category is the worst hit in the five year time period with 67 percent of its schemes underperforming their respective benchmarks. Avneet Kaur of spoke to Kaustubh Belapurkar, Director, Fund Research, Morningstar Investment, to find out the reason behind such poor show and what lies ahead for the value-oriented funds.

Value-oriented mutual fund category is the third worst performer in the last one year. In fact, these schemes have been underperforming for more than a year now. What is the reason for the underperformance?
There are quite a few funds in the value-oriented category which have fairly large mid cap and small cap exposure. Given that the correction has been broad-based around the small and mid cap stocks, we have seen those funds which had the exposure to small and mid caps in the value category have fallen. This is one of the reasons.

Secondly, even within the space of the large caps, the returns have been very staggered in terms of six to seven stocks driving the entire performance of the index vs high growth quality names. Given that high growth, high quality, high value names in terms of valuation will not form a part of the portfolio of the value funds that buy large caps, the performance of these kind of strategies is looking worse in terms of comparative numbers. Growth funds still hold some of these stocks.

Looking at the annual performance, value-oriented funds have done well in all those years when general equity funds also did well and vice versa. Clearly, value funds have failed to reward investors for the extra risk. Should discerning investors still bet on the category?
I would not entirely agree with it. Clearly in a rising market, value funds will tend to do well especially in the momentum-based market as we saw in 2017. When there is a sideways market, typically in down market, value funds tend to do better. Also, I don’t want to break it up in terms of year to year data and say that value funds have not done well. As a portfolio diversifier, we can see the way value fund will move compared to a pure growth fund. Adding a value-fund, the caveat is that it should be pure or at least a reasonable value strategy, over a market cycle, it can give you a good complimentary status over a pure growth strategy in your portfolio.

Won’t an investor be better off in a multi cap scheme?
This is a call that an investor has to take basis his risk profile. You can find value in all parts of the market. India is largely a growth market. You don’t get a deep value like you will find in more developed markets like US or Europe because their yields are different kind of yields and their stocks are not especially very great.

So, here value might just be a value trap. If you see most managers would be aligned to a relative value than an absolute value strategy. You can find this in both segments in the market- large caps or mid caps. Yes, you are right that if an investor is looking to add on value, maybe he is better off in a more largish or a multicapish strategy because if he is in the mid caps which get corrected very sharply, it will hit all kind of stocks not just growth or momentum stocks but value stocks also get hit sharply.

An investor who understands risk and probably who wants to take on that risk can look at relative value. But generally the sense will be to invest more in largecapish manner. The caveat is you need to look at the underlying construct of the portfolio. You should see that the manager is actually buying with a value bend rather than just being named value.

Most value-oriented schemes are invested heavily in mid and small cap stocks. Some mutual fund schemes have more than 80 per cent of the portfolio invested in small and mid caps. Top five funds in the category on the basis of AUM have anywhere between 21 per cent and 34 per cent of their portfolio invested in mid and small cap stocks. Do you believe the high exposure to mid and small caps stocks is right when the industry is fearing a longer pain in the smaller stocks. Some industry experts are also telling their investors to avoid small caps completely given the high risk and their incapability to generate adequate returns.
I would not agree to it. It finally comes down to what is an investor’s time horizon. If an investor comes and tells me that he wants to invest for next 20 years and he does not mind that if there is a loss of even 50 per cent of his portfolio. Then he is going for a fairly long term investment horizon and he has a very decent risk appetite. For an investor like that you can add small and mid cap in his portfolio.

But at the same time if an investor comes with a five year horizon and at any point he does not want his portfolio to fall more than 15 to 20 per cent then small is clearly not the place, he should purely focus towards large caps.

Market needs to be coupled with investors’ time horizon and risk appetite. I think that should be the driving force.

For those value funds which are invested in mid and small cap stocks, I would say there is value emerging in some pockets. Small and mid caps have corrected and on a relative valuations, they have come down and there could be probably pockets which are expensive but at the same time there would be pockets which are relatively cheaper as compared to peer group or even within the context of relative valuations. So there are pockets which a manger will try to identify irrespective of the capitalisation but again, most managers tend to follow certain mandates. So there will be managers who follow more of multi caps and large caps and there will be managers who invest heavily in mid caps and small caps so an investor needs to figure out which would be his favourable pocket in terms of his investment horizon and risk where he wants to play.

The category holds over Rs 54,000 crore of assets. What lies ahead for the value-oriented funds?
I think value as a strategy should always be complementary part of your portfolio. Like I said, India is still largely a growth-oriented market. There are no pure deep value strategy. In India there are mostly blend of value and core which falls between value and growth where the portfolio lies. It gives you a good amount of complementarity to the portfolio where a large holding is of course growth-oriented funds and you add 10 to 15 per cent in value strategy. It will give you kind of a movement which will protect you on the downside and at the same time in the overall market should do well. I would say it is a good portfolio diversifier but again you need to pick and choose strategy on the basis of risk and return expectations. I would definitely say that value has its merit.

Who should invest in value-oriented schemes? And what can they expect?
Over a market cycle, value fund should do reasonably well to compensate for giving up on growth portfolio.

Any advice to readers?
I would say two things. One is do not worry about value as a category not doing well in the short term. The reason is there are very high quality large cap companies which have actually done well and most of the companies have not really got any interest and that is why value is not looking that great as compared to other strategies. But it’s very short term. I would say you have to maintain the kind of discipline when you have come to investing in this.

Second is that evaluate if you have a value fund if it is investing more into small and mid caps. Think about does it meet your own risk and investment time horizon. If it does not, then you might want to reallocate probably to a large cap-oriented value fund. That is a call that you can take with advice from your financial advisor. He can figure out what suits your portfolio better.

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