3 Best Value Funds to Invest in 2023 – Top Performing Value Funds in India
December 28, 2022 Mutual Fund
The year 2022 proved to be a year of consolidation for global equity markets and witnessed a complete reversal of some of the major trends of 2020 and 2021. A liquidity-driven rally that started from the lows of March 2020, supported by cheap valuations and then by the earnings recovery, extended to 2021. During this period, investors didn’t pay any heed to extreme valuations and aggressively chased growth. Value investing as a style, and Value Funds, did not have many active takers.
But in the year 2022, against the backdrop of geopolitical tensions, supply chain disruptions, inflation, central banks across the world raising interest rates to tame inflation, and heightened stock market volatility, value investing regained focus yet again.
The Public Sector Undertakings (PSUs), especially defence sector companies and capital goods companies, amongst others, traded at single-digit Price-to-Earnings (P/E) multiples. Moreover, the fundamentals of these companies exhibited improvements in the year gone by. Similarly, the PSU banks that were the most neglected and trading at 1/3rd of their book values grabbed the attention of the value investors. And indeed, the value style played out extremely well.
I believe the year 2023 is also likely to favour Value Investing. This is because the resurgence of COVID-19 or some other virus (due to a potential bio war), inflation risk, central bank raising rates, and the global economy slipping into a recession or witnessing a significant slowdown, may lead to a correction in the equity market. In such times, Value Funds can be appropriate for your portfolio in 2023 and may prove rewarding in the long run.
What are Value Funds?
The capital market regulator, SEBI, defines Value Funds as equity-oriented mutual funds that follow the value-investment strategy, investing a minimum of 65% of its assets in equity and equity-related instruments with the flexibility to invest across market capitalisation and sectors.
A stock could be undervalued because a large number of investors may not have discovered it yet, or there could be a misperception about the company due to recent events. However, if the company is fundamentally strong, it is likely to overcome any hurdles over time. Consequently, its stock price will begin to reflect its actual worth.
It is important to note that not every stock that is trading at a significant discount to its historical average is considered a ‘value buy’; some of these stocks can turn out to be ‘value traps’. It is vital to discover the true worth of a stock (rather than chasing it merely because it is available cheap). Thus, Value Funds use various valuation metrics such as P/E ratio, P/B ratio, EBIT, EBITDA, cash flows, etc., along with profitability ratios such as ROCE, ROE, and ROA, among others, to judge the future potential of the stocks. Besides, a host of qualitative aspects of the company are analysed, such as its economic moat, circle of competence, economies of scale, the market in which it operates, brand value, management quality, corporate governance and culture, amongst a host of others. So, value investing is mainly guided by fundamentals, plus it also finds its place in the profound quote, “Beauty lies in the eyes of the beholder” by the Greek philosopher, Plato.
For the portfolio construction activity, the fund manager of a Value Fund usually follows a bottom-up approach to stock-picking, practising Value Investing principles and the portfolio could be market cap and sector agnostic.
How have Value Funds performed in the past?
Value Funds, as a sub-category of equity mutual funds, usually, has outperformed broader markets across timeframes and market cycles. During bearish market sentiments, Value Funds most often have limited the downside risk better than growth-style funds. The only time when Value Funds have underperformed growth funds is during times of extreme market stability or secular bull run, low inflation, and low-interest rates (which infuse risk-on sentiments and favour growth investing).
Table 1: Report card of Value Funds
Data as of 22nd December 2022
Returns are Point to Point and in %, calculated using the Direct Plan-Growth option.
Std. Dev and Sharpe Ratio are calculated over a 3-Yr period assuming a risk-free rate of 6% p.a.
Past performance is not an indicator of future returns.
*Please note, this table only represents the best-performing schemes based solely on past returns and is NOT recommendations as such. Speak to your investment advisor for further assistance before investing.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
(Source: ACE MF, PersonalFN Research)
As seen in Table 1, over 3 to 5 years or more, Value Funds have rewarded investors quite well for the risk taken. In other words, Value Funds have been able to generate ‘value’ or build wealth for their investors.
Which are the 3 Best Value Funds to Invest in 2023?
Amongst the leading and consistent performers within the Value Funds category, three funds stand out-ICICI Prudential Value Discovery Fund, Nippon India Value Fund, and UTI Value Opportunities Fund.
They have not only generated better risk-adjusted returns vis-a-vis their benchmark and other category peers, but their performance across market cycles has also been impressive.
Table 2: Performance of top 3 value funds during bullish market phases
| Scheme Name |
20-Dec-11 to 03-Mar-15 |
25-Feb-16 to 14-Jan-20 |
23-Mar-20 to Till Date^ |
| ICICI Pru Value Discovery Fund |
41.3 |
12.0 |
47.2 |
| Nippon India Value Fund |
31.2 |
16.3 |
43.2 |
| UTI Value Opp Fund |
26.2 |
15.1 |
39.6 |
| Category Average |
32.6 |
14.9 |
42.6 |
| NIFTY 500 – TRI |
27.0 |
16.6 |
40.5 |
^ Data as of 22nd December 2022
Returns are Point to Point and in %, calculated using the Direct Plan-Growth option
Returns over 1-year are compounded annualised; else absolutePast performance is not an indicator of future returns.
*Please note, this table only represents the best-performing schemes based solely on past returns and is NOT
recommendations as such. Speak to your investment advisor for further assistance before investing.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
(Source: ACE MF, PersonalFN Research)
In the current bull phase, ICICI Prudential Value Discovery Fund particularly has been a star performer with a CAGR of 47.2%.
Table 3: Performance of top 3 value funds during bearish market phases
| Scheme Name |
05-Nov-10 to 20-Dec-11 |
03-Mar-15 to 25-Feb-16 |
14-Jan-20 to 23-Mar-20 |
|
|
| ICICI Pru Value Discovery Fund |
-23.7 |
-16.8 |
-33.4 |
| Nippon India Value Fund |
-31.5 |
-20.1 |
-36.8 |
| UTI Value Opp Fund |
-14.2 |
-24.0 |
-35.8 |
| Category Average |
-26.9 |
-18.7 |
-37.6 |
| NIFTY 500 – TRI |
-28.2 |
-20.1 |
-37.8 |
Returns are Point to Point and in %, calculated using the Direct Plan-Growth option
Returns over 1-year are compounded annualised; else absolute
Past performance is not an indicator of future returns.
*Please note, this table only represents the best-performing schemes based solely on past returns and is NOT
recommendations as such. Speak to your investment advisor for further assistance before investing.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
(Source: ACE MF, PersonalFN Research)
In the last two bear phases as well, ICICI Prudential Value Discovery Fund has demonstrated its ability to arrest the downside risk better than many of its category peers.
The other two schemes, i.e. Nippon India Value Fund and UTI Value Opportunities Fund also have fared well.
Let’s take a closer look at the 3 best Value Funds now.
Best Value Fund to Invest in 2023 #1: ICICI Prudential Value Discovery Fund
Launched in August 2004, ICICI Prudential Value Discovery Fund aims to generate returns through a combination of dividend income and capital appreciation by investing primarily in a well-diversified portfolio of value stocks.
Following a large-cap bias, the scheme prefers to invest in companies trading at cheaper valuations as compared to their growth potential. The fund avoids investing in momentum-driven bets, which helps it to outpace its peers in the long run.
Historically, the scheme has taken contra calls not just on stocks and sectors but also on asset classes. The scheme tends to reduce its equity exposures when market valuations appear expensive, and the margin of safety has narrowed. But if the fund manager discovers ‘value’ in ignored counters/companies that fit in the selection process and investment strategy based on fundamentals, it considers them for the portfolio.
At present, when valuations look stretched, the fund is holding around 10% of its asset in cash. According to the portfolio disclosed as of 30th November 2022, ICICI Prudential Value Discovery Fund held 89.7% of its assets in equities, and the rest is debt and other assets.
Table 4: Top-10 holdings of ICICI Prudential Value Discovery Fund
| Holdings |
% of assets |
| Tri-Party Repo (TREPS) |
8.8 |
| Oil & Natural Gas Corporation Ltd. |
8.4 |
| Sun Pharmaceutical Industries Ltd. |
7.5 |
| NTPC Ltd. |
6.3 |
| ICICI Bank Ltd. |
4.7 |
| Bharti Airtel Ltd. |
4.3 |
| Axis Bank Ltd. |
3.4 |
| Infosys Ltd. |
3.4 |
| HDFC Bank Ltd. |
3.3 |
| State Bank of India |
2.5 |
Data as of 30th November 2022
(Source: ACE MF, PersonalFN Research)
The top-10 stock holdings accounted for 46.3% of the portfolio, with exposure to companies such as ONGC, Sun Pharma, NTPC, ICICI Bank, Axis Bank, HDFC Bank, SBI, Bharti Airtel, Infosys, and HCL Technologies. Amidst IT stocks experiencing strong selling pressure and pharma stocks doing poorly in 2022, the fund seems to have taken contra bets on them and invested selectively in IT and Pharma companies.
The midcap and smallcap companies have a weightage of 15.2% and 6.3%, respectively, in the portfolio. ICICI Prudential Value Discovery Fund’s portfolio has usually held 60 to 70 stocks in its portfolio, and currently also exposed to foreign equities such as Viatris Inc., Unilever PLC, and Vodafone Group Plc., and Mitsubishi UFJ Financial Group Inc.’s ADR.
Best Value Fund to Invest in 2023 #2: Nippon India Value Fund
Launched in June 2005, Nippon India Value Fund aims to seek capital appreciation and/or to generate consistent returns by actively investing in equity/equity-related securities predominantly in value stocks.
The fund has been following a well-defined stock selection framework. The scheme prefers to buy sound businesses depicting sustainable growth trajectories that are available at reasonable valuations. Nonetheless, to avoid value traps, it stays away from cheaper stocks that do not look promising from the long-term perspective.
At present, the fund seems to be betting big on three themes: domestic manufacturing, capex revival, and demand normalisation post-covid-19. Moreover, the fund has been capitalising on the rally in PSU stocks and has been trimming its exposure to the IT sector. Of late, Nippon India Value Fund has been adding beaten-down pharmaceutical companies to its portfolio.
As of 30th November 2022, the fund held a 78-stock portfolio. It remained almost fully invested with its equity exposure hovering at 96.6% of its assets. The remaining portion is held in cash and cash equivalent assets to take care of liquidity and redemption requirements.
Table 5: Top-10 holdings of Nippon India Value Fund
| Holdings |
% of assets |
| ICICI Bank Ltd. |
6.8 |
| Infosys Ltd. |
5.8 |
| HDFC Bank Ltd. |
4.9 |
| Larsen & Toubro Ltd. |
4.4 |
| Axis Bank Ltd. |
3.9 |
| Bharti Airtel Ltd. |
3.8 |
| Reliance Industries Ltd. |
3.6 |
| HDFC Ltd. |
3.1 |
| State Bank of India |
2.7 |
| Angel One Ltd. |
2.3 |
Data as of 30th November 2022
(Source: ACE MF, PersonalFN Research)
The top-10 stock holdings constituted 41.3% of the fund’s portfolio. The largecaps are 71.4% of the equity portfolio, while midcaps and smallcaps 22.3% and 6.3%, respectively.
Best Value Fund to Invest in 2023 #3: UTI Value Opportunities Fund
Launched in July 2005, UTI Value Opportunities Fund aims to generate long-term capital appreciation by investing predominantly in equity and equity-related securities of companies across the market capitalisation spectrum.
UTI Value Opportunities Fund follows a Largecap bias (67.7% of equity holding), while the exposure to midcaps and smallcaps is tactical, around 24.5% and 8.4%, respectively, depending largely on their relative valuations.
Historically, the fund has emphasised investing in stocks that have a scope to show improvements in return ratios and cash flows. It has preferred stocks trading at or below their intrinsic value. The fund refrains from frequent churning of the portfolio. In 2022, UTI Value Opportunities Fund trimmed its exposure to capital goods and selectively added pharma companies.
Table 6: Top-10 holdings of UTI Value Opportunities Fund
| Holdings |
% of assets |
| HDFC Bank Ltd. |
9.3 |
| ICICI Bank Ltd. |
7.4 |
| Infosys Ltd. |
6.8 |
| Axis Bank Ltd. |
4.9 |
| Bharti Airtel Ltd. |
3.8 |
| State Bank of India |
3.3 |
| Aditya Birla Fashion and Retail Ltd. |
2.3 |
| Hindalco Industries Ltd. |
2.3 |
| Maruti Suzuki India Ltd. |
2.1 |
| Bajaj Auto Ltd. |
2.1 |
Data as of 30th November 2022
(Source: ACE MF, PersonalFN Research)
As of 30th November 2022, UTI Value Opportunities Fund invested 98.3% of its assets in equity and equity-related instruments with a total portfolio of 57 stocks. The top-10 stock holdings accounted for 44.4% of the total portfolio. The cash and cash equivalent assets currently comprise around 1.5% of the assets, signally the fund manager has refrained from taking cash calls.
Who Should Invest in Value Funds in 2023 and beyond?
Since Value Funds invest predominantly in undervalued stocks trading at cheaper valuations, they often buy unpopular companies. They tend to reward investors only when the broader markets take corrective action which happens in the form of stock re-rating.
How long the stock re-rating can take? Well, this remains the most uncertain part of value investing. For instance, during the initial phases of the COVID-19 pandemic, global markets went from neutral to an oversold zone in just a few sessions; therefore, the bounce back from the lows was sharper and trapped bears on the short side. As against that, the PSU banks which took markets by surprise in 2022, have remained out of favour for over a decade, and despite the recent rallies, are still far away from their lifetime highs.
Hence, you ought to have a high-risk appetite and an investment time horizon of around 7-10 years when investing in Value Funds.
[Read: 5 High-Risk Mutual Funds That Can Reward You]
Your ‘core’ equity portfolio holdings (as per your risk profile, investment objective, and time horizon) should ideally comprise at least one worthy Value Fund. Besides a Value Fund, you may also consider adding large-cap funds and flexi-cap funds, amongst others to your core portfolio.
The term ‘core’ applies to the more stable and long-term holdings that are capable of performing well across market cycles and preferably should constitute up to 65%-70% of your overall equity portfolio.
Such portfolio construction with a good deal of diversification by including a Value Fund could offer resilience to your equity portfolio.
What are the 5 key benefits of investing in Value Funds?
The five key benefits of having a worthy Value Fund in the mutual fund portfolio are:
- A Value Fund manager, usually, looks forward to the bear or corrective phases of the equity market for stock picking, adopting a bottom-up approach. This, in turn, provides a margin of safety.
- A research-backed approach is followed adhering to the principles of Value Investing.
- The bottom-up approach to stock picking entails the identification of companies that have a good management team, good product line, high growth potential, and cheaper valuations compared to their peers. Plus, the industry and macroeconomic environment are considered.
- In times when valuations look overpriced, the fund manager may go overweight on cash. This strategy helps investors benefit from value buying during market corrections.
- A Value Fund can help one address his/her long-term financial goals.
That being said, in the year 2023, your patience and perseverance will be the key. Make sure you are keeping realistic return expectations when investing in Value Funds.
How to Select a Value Fund to Invest in 2023?
Choose a Value Fund carefully paying attention to:
- Whether the fund under the consideration truly adheres to the Value Investing principles
- Does it follow a bottom-up approach for portfolio construction
- Is the fund manager holding the portfolio with conviction perceiving value …or churning the portfolio too often
- How responsive is the fund management team to the developments that affect the companies that are part of the fund’s portfolio
- The expense ratio
- And a host of quantitative and qualitative parameters, viz. returns (across periods and market cycles), the risk the fund has exposed its investors to, the portfolio characteristics, the fund manager’s experience, the number of schemes he/she manages, among many others.
To pick the best Value Fund, investors should not rely excessively on past performance. This is because past performance is not indicative of future returns. Choose a Value Fund from a mutual fund house that follows a robust investment process & systems with effective risk management strategies in place.
This article first appeared on PersonalFN here
Related
Related Posts
