DSP Value focusses on building a portfolio of quality stocks available at reasonable prices.
Value investing as a strategy is finally back from cold storage. After years of sub-par performance, value funds have delivered well from the March lows this year. During 2017-2019, these funds lagged vis-à-vis growth schemes. Though past returns of value investors are abysmal over the last decade or so in many parts of the world, there are contrarians calling it the end of bad days for value investing.
DSP Value Fund (DSPV) looks set to benefit from the positive trend. The new fund offer will be open for subscription from November 20, 2020.
What’s on offer
The fund is an actively managed open-ended equity scheme that will follow a value investment strategy. The scheme will invest at least 65 per cent of the assets in domestic stocks. It can invest up to 35 per cent of the corpus in overseas stocks. Investments of up to 35 per cent of the AUM is allowed in fixed income instruments.
The benchmark of the scheme is the Nifty 500 Value 50 TRI. M Suryanarayan will be the fund manager for the domestic stock component of the scheme, whereas Jay Kothari will look after overseas investments.
The scheme focusses on building a portfolio of quality stocks available at reasonable prices. The investment process starts with the elimination of stocks that are either over-priced or of poor quality from the Nifty 500 universe. Presently, the fund is unlikely to have exposures to sectors such as retail/e-commerce, financials, hospitals and pathology labs, paints and insurance due to the valuation criteria. Large parts of consumer sectors, where valuations are generally quite rich, are likely to get eliminated on the valuation criteria. The fund, however, would consider these at a future date if valuations become attractive. Since assessing the quality of the book accurately is a tough task at this moment, many banking names will get excluded on the quality criterion.
The scheme plans to pick only high-quality stocks represented by factors such as high return on equity, positive cash flows, stable growth, regular dividend payouts among others, after applying its in-house research inputs. In order to further diversify geographically, the scheme will invest in overseas securities. It aims to do so through investments in listed shares and units of schemes managed by value investors with a proven track record. “The fund will not be investing in the existing FOF range of DSP. It will be restricted to overseas listed securities that align with the value theme,” says Kalpen Parekh, President, DSP Investment Managers.
DSPV may take exposure to short-term fixed-income investments or arbitrage opportunities if it does not find adequate investment opportunities in stocks.
What does not work
In a low interest rate environment, high valuations of risky assets such as stocks have become the norm. Value investors may not get adequate investment opportunities at this juncture, especially in companies that sport high return ratios. In the near future, value investing may continue to underperform the growth strategy.
Value opportunities are available when a company or a sector is out of favour for temporary reasons. Over a period of time, the market realizes such gaps and corrects them by pushing the prices upwards. However, markets may take longer-than-expected to correct the valuations or the investor may land in a value trap.
“Investors in this scheme should have a long-term orientation to endure phases of underperformance that is a part of the value investing journey.” says Parekh.
What should you do?
Rupesh Bhansali, head-mutual funds, GEPL Capital advocates sticking to existing value funds with good track record if you are keen to invest in a value-focused scheme, as you are aware of the fund manager’s approach to value investing and portfolio composition. “You should wait and watch for the portfolio composition and the investment strategy of DSP Value Fund. The scheme should be considered only after it builds a track record,” he adds.
Building a portfolio of attractively valued quality companies – both domestic and overseas – using a combination of quantitative and fundamental approaches to stock selection, should offer a relatively stable portfolio for investors, as the scheme may manage to avoid wrong selection of stocks. Overseas investments bring in exposure to business and themes that are not available in India. It can further help reduce risks, as the correlation of overseas investments with domestic equities is low.
Though the idea looks promising, you should wait to see how the scheme executes the investment strategy. Investments can be considered in this scheme, if it builds a track record.The NFO closes on December 4, 2020.