LUCKY WITH EVERY DIP THE ECONOMIC TIMES 21.12.2009
Value Funds have outperformed other benchmark indices in last few years. Investors may emulate the investment philosophy of these funds to make superior returns, say Santanu Mishra and Bakul Chugan Tongia of ET Intelligence Group
“Be fearful when others are greedy, and greedy when others are fearful”
—Warren Buffett
Learning from the past shows that for a naïve investor, it is better to stay invested in stock market for a longer time period. Market pundits are definitely going to agree on this point. 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. So, does it make sense for a retail investor to go by this concept while rejigging one’s portfolio? We at ET Intelligence Group, decided to carry out a quick analysis of the performance of value funds and find out what it means for our readers/investors. In an emerging, growth-centric economy like India, value funds have found only a few takers, which is clearly evident from their average asset holdings. Investors, however, cannot be blamed for this as returns from investment in value funds require patience. But eventually, the patience does pay off. 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.
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 (See Table on page 4).
However, 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. In 2008, 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%.
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 ET 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.
Our readers should not misconceive the fact that value picks are available when there is a stock market crash or economic downturn. 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.
Selecting the Valuable Stocks
THE ET telecom index has declined by around 13% at a time when Sensex has gained three-fourths from what it was in the beginning of this year. Stocks like Bharti Airtel, with strong fundamentals, are trading at price-earnings multiple of only 12-13x. This appears to be a good value pick if the investors plan to stay invested for the next 3-4 years. Some of the value funds like ICICI Prudential Discovery Funds have also realised this fact and acquired the stock this year.
Interestingly, the list of stocks these value funds have acquired over years comprises stocks not only from large-cap but also from mid- and small-cap segment. The names of some such small- and midcap stocks include Kalpataru Power Transmission, Rallis India, Zuari Industries, Shree Cement and Vardhman Textiles among others. Most of these stocks were picked up at a very low valuation. For instance, Zuari Industries, acquired in April 2007, was trading at a very low price-earnings multiple of around 1.5. Similarly, other stocks as mentioned above were accumulated when they were trading at a P/E multiple of around 5-6, whereas, historically they traded at a P/E multiple of more than 10.
Another important point to consider while investing in a value stock is to look at the dividend yield figures. Those companies which have track record of paying dividends, and have sound fundamentals, are likely to continue with their dividend payment policy. So, buy such stocks when the price falls to a very low level, such that dividend yield becomes pretty attractive.
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. Some of the stocks when their dividend yield was very high were acquired by these value funds at right time. Some of them are 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%.
Overall, it is not a bad idea to go by the value investing if the investor doesn’t have time and money to track the stock market regularly. The chances are high that investors will make higherreturns. However, one must be patient to realise the returns.
santanu.mishra@timesgroup.com
—Warren Buffett
Learning from the past shows that for a naïve investor, it is better to stay invested in stock market for a longer time period. Market pundits are definitely going to agree on this point. 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. So, does it make sense for a retail investor to go by this concept while rejigging one’s portfolio? We at ET Intelligence Group, decided to carry out a quick analysis of the performance of value funds and find out what it means for our readers/investors. In an emerging, growth-centric economy like India, value funds have found only a few takers, which is clearly evident from their average asset holdings. Investors, however, cannot be blamed for this as returns from investment in value funds require patience. But eventually, the patience does pay off. 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.
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 (See Table on page 4).
However, 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. In 2008, 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%.
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 ET 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.
Our readers should not misconceive the fact that value picks are available when there is a stock market crash or economic downturn. 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.
Selecting the Valuable Stocks
THE ET telecom index has declined by around 13% at a time when Sensex has gained three-fourths from what it was in the beginning of this year. Stocks like Bharti Airtel, with strong fundamentals, are trading at price-earnings multiple of only 12-13x. This appears to be a good value pick if the investors plan to stay invested for the next 3-4 years. Some of the value funds like ICICI Prudential Discovery Funds have also realised this fact and acquired the stock this year.
Interestingly, the list of stocks these value funds have acquired over years comprises stocks not only from large-cap but also from mid- and small-cap segment. The names of some such small- and midcap stocks include Kalpataru Power Transmission, Rallis India, Zuari Industries, Shree Cement and Vardhman Textiles among others. Most of these stocks were picked up at a very low valuation. For instance, Zuari Industries, acquired in April 2007, was trading at a very low price-earnings multiple of around 1.5. Similarly, other stocks as mentioned above were accumulated when they were trading at a P/E multiple of around 5-6, whereas, historically they traded at a P/E multiple of more than 10.
Another important point to consider while investing in a value stock is to look at the dividend yield figures. Those companies which have track record of paying dividends, and have sound fundamentals, are likely to continue with their dividend payment policy. So, buy such stocks when the price falls to a very low level, such that dividend yield becomes pretty attractive.
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. Some of the stocks when their dividend yield was very high were acquired by these value funds at right time. Some of them are 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%.
Overall, it is not a bad idea to go by the value investing if the investor doesn’t have time and money to track the stock market regularly. The chances are high that investors will make higherreturns. However, one must be patient to realise the returns.
santanu.mishra@timesgroup.com
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