VALUE Investing

Learning from the past shows that for a naïve investor, it is better to stay invested in stock market for a longer time period. The value of a stock can be realised in long term, they say. And the bottom of a cycle provides perfect buying opportunity for an investor. This philosophy, known as “value investing”, is one among several ways to make money in stock market. Fund managers in west swear by this logic.

In India, however, the application of this concept in a particular fund started getting popular only few years back. “Value Funds”, as they are known in India, have made use of value investing concept to make superior returns. But many investors find it difficult to differenciate between a Value Fund and other funds. They assume that the fund that gives the biggest returns is the best fund. It is not so. Value funds are more logical when it comes to stock picking and profit booking. There would be less fluctuations along the way. Above all the concerned fund manager needs greater balance of not jumping into momentum stocks that hit the Newspaper headlines everyday. He needs his own brain to manage a Value fund. To put it simply, Value investing is like cherry picking.

While there does subsist a popular perception that value funds fare poorly against their growth counterparts, in the long run, these funds do just as well or probably even better than the markets and their growth oriented peers. The portfolios of value funds comprise undervalued stocks. They also carry the risk of getting bruised in the downturn. Yet, these funds are better placed than other mid- or small-cap funds that are basically driven by momentary trading calls.

How did they perform ?
In Bull market, during last one year alone, value funds like ICICI Prudential Discovery, Tata Equity PE, Templeton India Growth and UTI Master Value have delivered over 100% returns, beating the market returns of about 65%-70% and the 82% average returns posted by the category of diversified equity schemes. Even over the period, as long as five years, these funds have comfortably beaten the market.

In 2008 bear market, for example, while most mid- and small-cap funds were beaten down with more than 60% erosion in their net asset values (NAVs), the fall in the NAVs of the value funds was at par with that of the major market indices ranging from about 51% – 55%.


How exactly does Value Funds operate ?
The basic philosophy behind cherry picking stocks remains same among all value fund managers — pick a fundamentally good stock from a sector going through a bad phase. For instance, during calendar year 2008, auto sector was going through a turbulent phase. Higher raw material cost and slack in demand resulted in its underperformance. The Auto index, for example, got almost halved in first-half of calendar year 2008 compared to around 35% drop in Sensex. But some of the funds acquired few blue-chip auto stocks like Bajaj auto and Hero Honda at that point of time. At the current price level, these value picks have yielded far superior returns, in the range of 100%-200%. This is more or less true for many other stocks picked by these value funds at different times.

At any point in time, there will be some sectors or group of companies going through a difficult phase and their stocks prices under performing the broader market indices. Investors may look at some of these stocks that otherwise have strong fundamentals. A recent case in point is telecom sector, which is going through a very tough time, thanks to rising competition.

Another important point to consider while investing in a value stock is to look at the dividend yield figures. For instance, the stock price of Tata Steel, in recent slowdown, came down to around Rs 150 resulting in a dividend yield of around 10-11%. Such a high dividend yield has two advantages: One, it provides an assured cash flow in the hand of investors even if the stock market is in a bear phase for a longer time period. Second, the minimum amount of return — dividend yield — is assured. Other stocks like Navneet Publications, NIIT Technologies, Rallis India and Gujarat Mineral Development Corporation among others. And the range of dividend yield for these stocks varies from 5-12%.

To sum up : The charactes of Value stocks are:
(1). Low PE stocks
(2). High Dividend Yield stocks
(3). Value funds are mostly Multicap in nature. What ever stocks that fit in the above two points are eligible in the 'VALUE' category.

By the time you read this article, many of us would have made up our mind to pick value stocks by ourselves. Honestly speaking, it is difficult to have a steady mind - that too in a volatile market. Hence it is ideal to invest in those mutual funds which invest with a Value style.