Value funds make a comeback after four years on broad-based equity rally

During the past one year, value funds have given average returns of 50.79 per cent, higher than large-cap and flexicap schemes

Value funds, which fell out of favour in 2017, are slowly gaining ground thanks to the broad-based rally in the equity markets. In the last one year, value funds have delivered average returns of 50.79 per cent, which is higher than what large- and flexi-cap schemes provided.

Value funds invest in stocks and sectors that are not in demand but have long-term growth potential and are also available on the cheap. From 2017 to March 2020, however, only growth and quality stocks were in the limelight as the Indian economy slowed and performance of value funds deteriorated.

After the sharp correction in March 2020 and equity markets bouncing back in the following months, though, value funds have started to deliver strong returns. In the last year IDFC Sterling Value Fund has provided the highest return in the category at 74.12 per cent, followed by Templeton India Value Fund, which has delivered returns of 65.80 per cent.

On the other hand, average large- and flexi-cap returns have been 44.19 per cent and 46 per cent, respectively, shows data from Value Research.

S Naren, executive director and chief investment officer of ICICI Prudential AMC, says, “We believe a year back value was in the early stages of playing catch-up with growth and quality, which had rallied significantly till then. Also, there was investor interest in beaten down pockets such as metals, telecom and others, which were deep value opportunities. A combination of these factors has aided the strong performance of value funds over the past year.”

Typically, a value fund invests in stocks that have potential for reasonable upside but are currently available at a discount to their fair or intrinsic value. Sorbh Gupta, fund manager — equity, at Quantum MF, says that as a value fund manager the firm always looks at companies that are below their intrinsic value.

“After the March 2020 correction, a lot of good companies fell below their intrinsic value and we were able to buy good quality companies and marketleaders. Since then, we have seen a recovery in the economy at a more broad-based level and earnings upgrades across the spectrum, which helped value funds,” added Gupta.

Fund managers who had invested in telecom, metals, pharma, and IT sectors have gained the most as equity markets recovered after the sharp fall last year. Over the past year the metal index has risen 114.75 per cent, while the IT index has risen 84.45 per cent.

However, investors need to realise that value funds underperform as markets go through different cycles. “The global experience has always been that value as a strategy will not work all the time but tends to deliver sizable returns in the long run. Until September 2020, value was out of favour which was also the case during 1988-89 and 2007-2008,” added Naren.

Value funds will continue to do well if the economy recovers and there are earnings upgrades. Fund managers say that if the economy slips and market falters, it will be difficult for value funds to perform, and growth and quality stocks might make a comeback.