BackApproach value investing without falling into value trap
Experts say that finding intrinsic value is easier said than done
PremiumValue investing may be the preferred route of investment for famous investors such as Benjamin Graham, Warren Buffett, Radhakishan Damani and Rakesh Jhunjhunwala, however, value-picking hasn’t got much limelight in the recent times.
Speaking at the Mint Mutual Fund Conclave 2022, Sankaran Naren, executive director and chief investment officer at ICICI Prudential Asset Management Co. Ltd, said that people often link value investing with contrarian investing, “but it is wrong".
“If you buy junk and say that I am doing value investing. It is not. As Seth Klarman (American hedge fund manager) said, value investing is at its core the marriage of a contrarian streak and a calculator." To put simply, value investing is about buying fundamentally robust companies at cheaper prices.
Naren was instrumental in launching ICICI Prudential Value Discovery Fund in 2004. It started out with about ₹132 crore of assets and is today worth ₹25,000 crore.
For Rajeev Thakkar, chief investment officer and director, PPFAS Asset Management, investing in itself is value investing, rest is trading.
“If the fundamental approach of investment is that the price will go up, then your focus is speculation-driven. So, it is trading. If you are buying a stock at ₹80, whose intrinsic value is ₹100, it is value investing, but buying at ₹120 is not investing. People may slice and dice such actions into growth and quality investing, but it doesn’t make sense."
Experts say that finding intrinsic value is easier said than done. For example, people applied the formula of discounted cash-flows (DCF) in valuing the new-age companies. “DCF is mathematical course of action. But it is like a Hubble telescope. You move it one inch and you are in a different galaxy. Similarly, depending on the assumptions one has taken of terminal value, growth and cost of capital, you can get whatever mathematical value you want. This is where the difference between value investing and day-dreaming comes," Thakkar said.
He believes that best fiction is not written on Microsoft Word but Excel. “Last year people put a lot of money in low RoCE businesses, which were burning cash to acquire customers. To my mind, this model won’t work in positive real interest rate era."
How to avoid value traps
As per Naren, one cannot avoid value traps. “For example, in the 2006-07 period, we would read more Benjamin Graham. So, we added a little bit more textile, paper and fertilizer, and we realised that this kind of model doesn’t work even in India. We left it and said let’s buy pharma and consumer. Buy something more contrarian. That approach worked much better."
Second key aspect is patience. “As and when you get the opportunity, you will have to grab them and that is the learning that we have over a period of time," said Naren.
Value investing in asset allocation
Investors should not limit value investing to equities. One of the key initiatives that Naren has taken is to expand it to other asset classes by focusing on a category like balanced advantage fund. “It is also value investing and that is less of a value trap because you are buying an asset class which is cheap. As an AMC, we had a much more pleasant experience doing value investing with multi-assets. We do asset allocator where we added gold. Recently, we added a product called passive multi-asset where we put ETFs of global, local, gold and go active."
Naren is seeing value opportunities in fixed income, floating rate bonds and PSUs.
On the other hand, Thakkar is of the opinion that in the US, price is what you pay, and value is what you get. But for him India is different. “Price is what you pay, but value is what promoters will let you get. In India, we have something called return on promoter equity. Apart from looking at traditional valuations’ metrics, it is important to focus on management quality and how they are allocating capital."
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