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Value investing is a philosophy that seeks out companies that are underpriced relative to their intrinsic value (Mint)
Value investing is a philosophy that seeks out companies that are underpriced relative to their intrinsic value (Mint)

DSP Mutual Fund takes contrarian call by launching a value fund

Growth funds have beaten value funds, which seek out firms that are relatively underpriced, after many years

After several years of the value strategy underperforming the growth strategy, DSP Mutual Fund has taken a punt on mean reversion. Value investing is a philosophy that seeks out companies that are underpriced relative to their intrinsic value. It is usually contrasted with growth investing which buys fast growing companies even if they trade at high valuations in order to benefit from their future growth.

The fund house is launching a value fund with an allocation of up to 35% of the corpus in global value stocks and the rest 65% in domestic companies, also selected according to a value philosophy. The new fund offer (NFO) for this fund opened on Thursday.

“In today’s market, good companies are largely fully valued. And cheap companies aren’t necessarily value creating. Hence, applying mechanical principles like PB (price-to-book, which measures the price of a stock in relation to its accounting value) or dividend yield in isolation may not work. We will look at valuations (PB) in context to other quality parameters like RoE (return on equity), profit stability for each sector and then build a portfolio of good companies but not very expensive," said Kalpen Parekh, President, DSP Investment Managers Pvt. Ltd.

For international allocation, the fund is slated to invest in holding companies which in turn have diversified value portfolios. For instance, Warren Buffett’s Berkshire Hathaway in the US follows this type of structure.

In addition, the fund will use futures and options to hedge another 35% of the corpus if valuations in India’s domestic stock market get stretched. Value funds as a category have struggled against growth over the past few years. Their average compounded annual growth rate (CAGR) over the past three years is 1.5% compared to 7.33% for large-cap funds and 4.65% for multi-cap funds. “Value as defined by statistical cheapness has struggled. There are various lens of deciding what’s value. Our approach is to look at valuations but not at the cost of quality," Parekh said.

Experts have taken a cautious stance. “It’s too early to take a call on value turning the corner. I would want to wait for some time and see the evidence. Also ,in general, I prefer schemes with an established track record over NFOs," said Anand Rathi, founder, Augment Capital Advisors LLP, a mutual fund distributor.

Amol Joshi, founder, Plan Rupee Investment Services, a Mumbai-based mutual fund distributor, asked investors to avoid taking a large allocation to the fund. “A thematic fund like a value fund can sometimes outperform and sometimes underperform and should not be the core of your portfolio. Performance is cyclical," he said. So weigh your options and don’t rush into investing.

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