MFs explore new offerings as quality pack steals march on value stocks

WhiteOak Capital and ICICI Prudential have sought regulatory approval for a first-of-its-kind active quality fund

Mutual funds (MFs) are gearing up with offerings centered on the ‘quality’ theme, as this investment approach is expected to rebound following three years of underperformance compared to the ‘value’ theme.

In quality investing, the focus is on stocks with strong fundamentals like high return on equity (ROE) and low leverage. On the other hand, value investing largely focuses on the valuations.

WhiteOak Capital and ICICI Prudential have sought regulatory approval for the first-of-its-kind active quality fund. In addition, Edelweiss MF is also poised to launch the first Nifty 500 Multicap Momentum Quality 50 ETF on October 11.

A look at two of the value and quality indices of NSE shows early signs of a perceptible shift in the tide. Over the past three months, Nifty 200 Quality 30 Index Fund has surged 13 per cent vis-a-vis 8 per cent rise in Nifty 200 Value 30.

The shift in trend comes years after value took a lead over quality. For the one-year period, Nifty 200 Value 30 is still ahead of Nifty 200 Quality 30 with 76 per cent and 45 per cent gains respectively.

Radhika Gupta, managing director and chief executive officer, Edelweiss MF said the decision to launch the ETF is driven by the change in market dynamics.

 

"We decided to launch the fund based on the observation that the quality factor has started performing better now. In addition, we thought a quality filter will help reduce the risk, especially with respect to the midcap and smallcap allocation. This can help avoid stocks that have gone up far ahead of their fundamentals," she said.

According to Manuj Jain, head, Product Strategy at WhiteOak Capital AMC, quality investing makes sense during uncertain market conditions, given the resilient business models of such companies.

"They usually possess sustainable competitive advantages and are often industry leaders with resilient business models that enable them to withstand uncertain market conditions. The quality theme performed well in CY2018 and CY2020 but has underperformed in recent years. It's important for investors to remember that 'winners rotate," he said, adding that while the AMC has planned the fund, the launch depends on regulatory approval.

Last month, a study conducted by PGIM India Mutual Fund showed that companies that fulfilled quality and growth metrics outperformed the rest of the stocks in NSE 500 between June and August. This is in contrast with the performance reported from April 2023 to May 2024.

The study pointed out that the shift is underpinned by the valuation comfort in quality and growth companies’ vis-a-vis value stocks along with the expected reversal in interest rate cycle.

SBI MF, the largest fund house, has also been highlighting the shift in trend in its reports.

"As a style, quality has begun to do well with the top quintiles on quality outperforming the bottom quintiles in August," the fund house said in its September factsheet.