3 value funds helmed by seasoned managers

By Morningstar Analysts |  13-01-21 | 
 

Value funds typically invest in stocks that are trading less than their intrinsic value. Value fund managers look at attributes for evaluating a stock based on valuation--price/earnings, price/book, and enterprise value/sales--over a period of time. They also identify stocks that are currently depressed with low Return on Capital Employed and Return on Equity and have the potential to generate higher returns.

The investment universe of these funds spans across market capitalisations and sectors. There are 18 value funds in the industry which collectively manage asset worth Rs 58,917 crore as on December 2020.

Here are three bronze rated value funds recently reviewed by our analysts.

ICICI Prudential Value Discovery Fund

  • *Fund Manager: Sankaran Naren (Mrinal Singh, former fund manager)
  • Star Rating: 5 stars
  • Analyst Rating: Bronze
  • Analyst: Himanshu Srivastava
  • Date of Analysis: December 2020

Mrinal Singh’s investment approach entails scouting for stocks he believes are trading at a significant discount to their fair value. In the current scenario, he is selecting stocks largely based on relative valuations. Additionally, he looks for differentiating factors (technological prowess, cost advantage) that can give the company a sustainable edge. Until mid-2014, Singh invested predominantly in the small/mid-cap segment. However, stretched valuations in that space and surging assets prompted him to expand his investment universe to accommodate large-cap stocks.

While a bottom-up approach is more prominent, top-down factors aren’t ignored. With the investment strategy rooted in value bets, the fund’s portfolio is significantly distinct from the benchmark index and other funds. He is patient with his stock picks especially from the small/mid-cap segment, a strategy that jells well with his investment philosophy. The strategy is not without risk. It can hold the fund back in rising markets when valuations are stretched and can lead to value traps. Hence, its long-term success will depend in no small measure on the manager’s execution capabilities. On that count, we believe Singh is equipped to successfully ply the strategy.

*Mrinal Singh, erstwhile fund manager of ICICI Prudential Value Discovery Fund, has resigned from his position. Going ahead, the scheme will be managed by Sankaran Naren, Executive Director and Chief Investment Officer, ICICI Prudential Mutual Fund.

IDFC Sterling Value Fund  

  • Fund Manager: Anoop Bhaskar
  • Star Rating: 2 stars
  • Analyst Rating: Bronze
  • Analyst: Himanshu Srivastava
  • Date of Analysis: December 2020

Anoop Bhaskar draws on his experience, in-depth understanding of stocks, and analyst recommendations while investing. He runs the fund using a relative valuation strategy rather than absolute valuation. Therefore, while the valuation is the premise of the investment approach plied here, the fund doesn’t qualify as a true-blue value fund.

While investing, Anoop tries to understand long-term trends and pick fundamentally sound companies, having monopolistic presence, at early stages and that have a competitive advantage in their respective spheres. Bhaskar has a relatively stringent stock-selection criterion. He prefers companies that have decent amount of promoter holdings, good cash generation, and low leverage and businesses that are profitable over a cycle. He avoids businesses that show profitability in spurts. Although he believes in playing the entire business cycle in an issue, he can skilfully deploy tactical plays as well to capitalise on short term opportunities. Sell-side research is extensively used, and the in-house team builds its investment thesis on that. Nonetheless, buy and sell decisions are made internally.

UTI Value Opportunities Fund

  • Fund Manager: Vetri Subramaniam
  • Star Rating: 4 stars
  • Analyst Rating: Bronze
  • Analyst: Nehal Meshram
  • Date of Analysis: November 2020

The fund has more flexibility to position itself actively across the market-cap spectrum and has a value bent. Vetri Subramaniam follows a mix of top-down and bottom-up approach while taking aggressive sector positions. The positioning is based on valuation considerations and medium-term growth prospects.

The initial quantitative screening process identifies companies that have generated higher operating profits and demonstrated long-term ROE. Vetri emphasises the trends and patterns discerned more from historical performance than from the forecasts. For the qualitative aspect, he focuses mainly on management quality, the company’s business model, and competitive advantages. While selecting securities from the existing universe of 315 stocks, Vetri follows a barbell strategy and invests in growth companies even at a premium if he believes the valuations are reasonable and the company has the potential to generate economic value through the cycle. He is also willing to operate on the other side of the spectrum--with the potential for mean reversion in valuation. According to the manager, the value in the portfolio is buying stocks at less than their intrinsic value.

Do note that the Analyst Rating mentioned above are for regular plans. Direct plans may have different ratings.

© 2020 Morningstar. All rights reserved. The Morningstar name is a registered trademark of Morningstar, Inc. in India and other jurisdictions. Research on securities, referred to for the purpose of this document as “Investment Research”, is issued by Morningstar Investment Adviser India Private Limited, which is registered with SEBI as an Investment Adviser (Registration number INA000001357), providing investment advice and research, and as a Portfolio Manager (Registration number INP000006156). For the complete disclaimers, click here.

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sandeep deshmukh
Jan 14 2021 06:49 AM
 Read the papers. Mrinal Singh of ICICI Prudential Value Discovery Fund has quit. Posting because Morning Star is always clueless. Your article is outdated.
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