Canara Robeco Mutual Fund (MF) on August 10, 2021, announced the launch of its value fund. The new fund offer (NFO) will open for subscription between August 13, 2021 and August 27, 2021.
Canara Robeco Value Fund (CRVF) as the name suggests will follow value style of investing. Nimesh Chandan, head-investments, equities, Canara Robeco MF, said that the equity fund will look for opportunities in sectors and companies that are mispriced due to heightened market reactions.
Chandan pointed out that value investing looks at future growth prospects of the company, but has a conservative estimate of growth to keep some room for any possible errors in forecasting of future growth.
The value fund will look for companies that have so far underperformed. The underperformance of the stock could be due to various reasons such as change in sector’s outlook, or the company’s internal issues such as management change and restructuring. The market values of such companies could be lower than their intrinsic values.
This difference between market value and intrinsic value gives, what value investors call as margin of safety. The wider the difference, the higher is the margin of safety. Using this margin of safety, the investors can minimise the impact on their investments even if they have wrongly estimated the future prospects of the company.
“It is critical that investors have a fund following a value style of investing in their portfolio for diversifying their investments. There are two ways you can add value style in your portfolio, one is through value funds or through fund managers who follow this approach," says Vishal Dhawan, founder and chief executive officer of Plan Ahead Wealth Advisors.
“At a time when there are concerns around valuations in the stock market, a value style of investing is focused on picking stocks that might be undervalued. Even if markets decline from hereon, such stocks may fall less as these are already undervalued,” says Ravi Kumar TV, co-founder, Gaining Ground Investment Services.
“Growth style of investing can go out of favour if companies fall short of the high growth expectations. Valuations of such stocks are factoring in high growth rates and these stocks can see sharp decline if these are not met. That is when value stocks -- with strong cash flow visibility --- can come into favour,” he adds.
What doesn’t work?
Value funds can go through long periods of underperformance. This is because it can take a long time for markets to realise value of a stock.
During this period, a value fund can significantly underperform other equity funds.
Vishal Mishra, fund manager, Canara Robeco MF, says, “We will be prioritising investment opportunities in companies with near-term triggers so that values can be realised sooner.”
Chandan says investors should at least have a three-year investment horizon.
Nisreen Mamaji, founder, MoneyWorks Financial Services, says anyone looking at a value fund should have long-term investment horizon.
“The value-discovery might happen in later part of your investment tenure. Investors should also be prepared for higher volatility,” she says.
A comparison of category average returns of value funds with other regular equity categories shows that in three-year and five-year periods, show value fund category has underperformed others.
The average return of value funds is 11.6 percent in three-year period, while flexicap category has given average returns of 13.8 percent and large & midcap category has delivered 14.3 percent returns, according to data from ACE MF.
Both the categories have given over 14 percent returns in five-year period, while value funds have given average returns of 12.8 percent.
It is important to have a value fund in your portfolio, to diversify with a different investment style. There can be periods when one investment style might do better than the other.There are 16 existing value funds in the MF industry, managing assets worth Rs 71,530 crore. While some of Canara Robeco MF’s equity schemes have done quite well in recent periods, it would be better to pick a value fund with a long track-record.