How this value fund came to top the returns chart

In a short span of time since its launch (August 22, 2022), MOEV has managed to top the charts. Its size, along with its index variant, is roughly Rs 65 crore as of October-end.

The secret sauce

The ETF’s benchmark S&P BSE Enhanced Value Index aims to capture the top 30 stocks in the S&P BSE large and mid-cap index with the most attractive valuations, as measured by Price-to-Earnings (P/E), Price-to-Book (P/B), and Price-to-Sales (P/S) ratios.

According to Mahavir Kaswa, Head of Research – Passive Funds, at Motilal Oswal AMC, a ‘Value Factor’ Index is expected to outperform the broader markets in the recovery phase. “On the flipside, it is expected to underperform when the markets crash,” he said.

To be sure, in the Indian context, there is no difference between ‘Value’ and ‘Enhanced Value’. The term ‘Enhanced Value’ is borrowed from the US markets, where the S&P Dow Jones Index has three value indices based on the S&P 500: S&P 500 Value, S&P 500 Pure Value, and S&P 500 Enhanced Value.

What fuelled the returns?

Value had been a stark underperformer throughout the 2010s as growth stocks were in favour across markets.

“However, as the recovery started after the covid-19 crash, value has made a strong comeback. In the case of Indian markets, the value factor tends to be overweight on public sector units and public sector banks. PSUs and PSBs in financial services, commodities, and energy sectors have done exceedingly well over the last couple of years,” said Kaswa.

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In the ETF’s benchmark, PSU stocks had a total weightage of 66.4 percent as of September 30. In terms of sectoral allocation, banks came in first at 21.36 percent, followed by petroleum products at 13.10 percent and Finance at 11.45 percent.

ONGC has the highest weightage in the benchmark at 8.05 percent, followed by NTPC (8.04 percent), State Bank of India (7.84 percent), Hindalco Industries (7.60 percent) and Tata Steel (7.25 percent).

Stocks in the ETF that saw the best rally were Indian Railway Finance Corporation (221 percent), REC (181 percent), Power Finance Corporation (169 percent), Union Bank of India (89 percent) and General Insurance Corporation of India (84 percent). These returns are over the past one-year period.

“The fund has captured the credit upcycle through financial services sector with higher allocation to PSU names. Further it has bet on public sector banks getting rerated, energy stocks. That has given the bulk of the returns,” said Ravi Kumar TV, Founder of Gaining Ground Investment Services.

The outlook

To be sure, Motilal Oswal S&P BSE Enhanced Value ETF is a unique fund based on BSE-listed stocks, with a universe of the top 200 large and mid-cap stocks. UTI Nifty 500 Value 50 Index Fund is a broader index focusing on large, mid and small-cap stocks listed on the NSE.

When it comes to strategy, over the past three years, value as a theme has done well given the overall slowdown in global growth. This is the key reason why most value-themed active or passive funds have done well during this period.

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However, Kumar is of the opinion that if there is any change in government in the upcoming general elections such strategies may underperform.

“If you have a long-term horizon, then have a balanced portfolio between value and growth. You don't know when value or growth themes will do well, but both perform well in cycles,” said Rushabh Desai, Founder, Rupee With Rushabh Investment Services. “However, remember that value is going to be a little more cyclical and growth is going to be a little more consistent.”

Dhuraivel Gunasekaran contributed to this story.