Value investing means different things to different people. At its core, it is about buying stocks which trade at a significant discount to their intrinsic value.
Growth investors are attracted to companies that are expected to grow faster (revenues, profits or cash flows) than the rest. Value investors scout for diamonds in the rough—companies whose stock prices don't reflect their fundamental worth. The fund manager hunts for bargains, which means stocks selling at a discount to its intrinsic worth. This is based on the presumption that over time the market properly recognise the company's value and the price will rise.
A quote from the world's most famous value investor says it all: If you’re an investor, you’re looking at what the asset – in our case, businesses – will do. If you’re a speculator, you’re primarily forecasting on what the price will do independent of the business.
That was Warren Buffett on value investing.
Here's a look at the value funds Morningstar's analysts took a look at.
L&T India Value analysed by Kavitha Krishnan
- Analyst summation: Though led by an experienced fund manager, we are wary of changes in the analyst team and a long portfolio tail.
- Date of analysis: May 2019
- Analyst rating: Neutral
- Investment style: Large Growth
- Fund manager: Venugopal Manghat
- 5-year annualized return: 14.48%
- Star rating: 4 stars
- Top 5 stocks: ICICI Bank, RIL, Infosys, SBI, Axis Bank
- Equity holdings: 76
Venugopal Manghat uses a bottom-up approach to select stocks and is focused on identifying companies that have a significant potential to grow in terms of its upside. He looks at factors including a positive operating cash flow and discounted cash flow valuations along with other metrics (PE, PB, EV/EBDITA). Valuations are looked at both on a relative basis within the sector and on an absolute basis versus its historical valuations. The manager undertakes a sum-of-parts valuation with a view to understand how individual businesses and valuations within a group add up.
While Manghat invests in stocks that are going through temporary downturns, he will avoid investing in companies that could go through long-term phases of underperformance. The diversified approach could lead to the fund holding some illiquid names as part of the portfolio.
ICICI Prudential Value Discovery analysed by Himanshu Srivastava
- Analyst summation: We draw conviction from the fund manager’s capabilities and research focus.
- Date of analysis: December 2018
- Analyst rating: Silver
- Investment style: Large Blend
- Fund manager: Mrinal Singh
- 5-year annualized return: 10.56%
- Star rating: 4 stars
- Top 5 stocks: SBI, Infosys, Sun Pharma, NTPC, IOCL
- Equity holdings: 42
Mrinal Singh relies on a combination of absolute and relative valuation parameters (PE, PB, EV/EBITDA). Additionally, he looks for differentiating factors (technological prowess, cost advantage) that can give the company a sustainable edge.
Until mid-2014, Singh invested predominantly in the small/mid-cap segment. However, stretched valuations in that space and surging assets prompted him to expand his investment universe to accommodate large-cap stocks. He is patient with his stock picks, especially from the small/mid-cap segment, a strategy that gels well with his investment philosophy.
While a bottom-up approach is more prominent, top-down factors aren’t ignored.
The strategy is not without risk. It can hold back the fund in rising markets when valuations are stretched and can lead to value traps. Hence its long-term success will depend in no small measure on the manager’s execution capabilities. On that count, we believe Singh is equipped to successfully ply the strategy.
IDFC Sterling Value analysed by Himanshu Srivastava
- Analyst summation: This fund is well placed under Bhaskar’s leadership and we draw conviction from his presence.
- Date of analysis: November 2018
- Analyst rating: Silver
- Investment style: Mid Growth
- Fund manager: Anoop Bhaskar
- 5-year annualized return: 12.59%
- Star rating: 4 stars
- Top 5 stocks: Future Retail, RBL Bank, ICICI Bank, Axis Bank, Ramco Cements
- Equity holdings: 80
Anoop Bhaskar draws on his experience, in-depth understanding of stocks, and analyst recommendations while investing. He runs the fund using relative valuation strategy rather than absolute valuation. Therefore, while the valuation is the premise of the investment approach plied here, the fund doesn’t qualify as a true-blue value fund.
Bhaskar looks at three attributes for evaluating a stock on valuation—PE, PB, EV/sales over a trailing 12-month period. A stock qualifies on his valuation expectation if two out of these three attributes are lower than the industry average.
While investing he tries to understand long-term trends and pick fundamentally sound companies, having monopolistic presence, at early stages; and have a competitive advantage in their respective spheres.
Bhaskar has a relatively stringent stock selection criterion. He prefers companies which have decent amount of promoter holdings, good cash generation, low leverage and businesses which are profitable over a cycle. He avoids businesses which show profitability in spurts. Although he believes in playing the entire business cycle in an issue, he can skillfully deploy tactical plays as well to capitalise on short-term opportunities.
Interestingly, no one single stock has an exposure of over 5%, Future Retail has a portfolio weight of 4.15%.
UTI Value Opportunities analysed by Nehal Meshram
- Analyst summation: While the restructuring will bring about a positive outcome, we need to see sharp signs of a turnaround.
- Date of analysis: September 2018
- Analyst rating: Bronze
- Investment style: Large Growth
- Fund manager: Vetri Subramaniam, Amit Premchandani
- 5-year annualized return: 8.08%
- Star rating: 2 stars
- Top 5 stocks: HDFC Bank, ICICI Bank, Infosys, Axis Bank, TCS
- Equity holdings: 58
The fund follows a strong investment culture driven by a well-defined process. The fund now has more flexibility to position itself actively across the market cap with a value bent. Vetri Subramaniam follows a mix of top down and bottom up approaches, while taking aggressive sector positions in the fund. The positioning is based on valuation considerations and medium-term growth prospects.
The initial quantitative screening process determines companies that have generated higher operating profits and demonstrated long-term ROE. The manager emphasizes the trends and patterns discerned more from historical performance than from the forecasts.
For the qualitative aspect, he focuses mainly on management quality, the company’s business model, and competitive advantages.
While selecting securities from the existing universe of 350 stocks, Subramaniam follows a barbell strategy and invests in growth companies even at a premium if he believes that the valuations are reasonable, and the company has the potential to generate economic value through the cycle. He is also willing to operate on the other side of the spectrum—with the potential for mean reversal in valuation. According to the manager, the value in the portfolio is buying stocks that are less than their intrinsic value. He invests in stocks that are currently depressed with low ROCE/ROE and have the potential to generate higher returns.
