How India’s legendary ‘value’ investor transitioned his investment style to embrace ‘growth’

Sankaran Naren - ED & CIO - ICICI Prudential Mutual Fund

India’s largest value mutual fund scheme, the ICICI Prudential Value Discovery Fund (IPVDF), has turned 20. At Rs 50,154 crore as of August 2024, the scheme has a market share of 39 percent. According to the fund house, Rs 10 lakh invested in IPVDF at inception would have become Rs 4.56 crore by the end of July 2024, while a systematic investment plan (SIP) of Rs 10,000 every month since inception would have grown to Rs 2.30 crore. And if Sankaran Naren, the fund house’s Chief Investment Officer (CIO) is to be believed, IPVDF is set for an encore, as its approach can work in a growth market as well.

Naren is also the scheme’s co-manager, along with Dharmesh Kakkad. Only one other fund manager, Mrinal Singh, has managed the fund in all these years. When Singh left the fund house in 2021, Naren once again took charge (with Kakkad). He also managed it singlehandedly from launch till 2011.

ICICI Prudential Value Discovery Fund

The nuts and bolts of value investing

Naren says that when the fund was launched in August 2004, he used to pick stocks with low price-earnings (PE) and price-book (PB) ratios. Or what is more popularly known as cigar-butt investing, a phrase coined by the legendary Warren Buffet to describe how he would pick up beaten down stocks, in the hope that when the markets turn around, the stock prices would rise and he would make money. It draws an analogy with a cigar butt found on the street with just  one or two puffs left in it. The cigar may not be much of a smoke, but whatever puffs it has to offer is mostly profit, since it was picked up at little or no cost.

Eventually, Buffet’s model evolved and so did that of value investors globally, including Naren and his team. “We realised in 2007 that the cigar-butt model is no longer relevant,” says Naren, and  adds that that’s  when he and his team moved to focussing more on a company's business and its management.

“We moved towards good businesses that were fairly valued, rather than average businesses at a cheap valuation,” he explains.

Naren explains that value investing involves buying stocks below their intrinsic value, which led the fund to invest in telecom, metals, and power; sectors that were struggling not due to flawed business models, but because of external, temporary challenges.

Ups and downs

IPVDF’s performance has been quite steady over the years, with the scheme mostly in the top quintile. But it went through rough patches in 2007 and 2017, when the value strategy tested Naren’s patience.

In 2007, the infrastructure sector outperformed most others.  In 2008, Naren recalls mid and smallcap stocks outperformed, “irrespective of how they had fared in 2007.” As the fund had avoided both these segments at the time, it paid a price.

“Value investing is a test of patience and temperament, and that's one of the reasons why we believe long-term investors are the biggest beneficiaries of value investing. Those who choose to adopt value investing when it is doing badly are those who derive the greatest benefit from it,” explained Naren.

A small fund becomes a giant

Although Naren and his team continues to manage IPVDF through a value-based approach, the scheme looks a tad different from what it was in its formative years. Now, broadly, 70 percent of its portfolio is in largecaps. In its early years, it used to be mid and smallcap oriented due to its smaller size.

After Naren and Kakkad took over the fund following Singh's departure, IPVDF became more diversified and the tail (smaller holdings) grew longer. In fact, Naren says that as and when equity markets correct sharply, and mid and smallcaps become cheaper, he may go shopping in that segment. Additionally, “if the overseas investment cap increases, we may diversify globally when Indian markets seem overvalued, and return to Indian stocks when they offer better value. This kind of adaptability will be crucial as the fund grows further,” asserted Naren.

Is there any future in value investing and can IPVDF continue its stellar run, now that the fund is a giant? “The biggest learning for us is that the value strategy can work in a growth market too,'' said Naren, and added that what makes him happy is that not many fund houses are focussed on the value philosophy.

There are just 20 value-styled MF schemes in the market, and the second-biggest scheme in this category is worth just Rs 13,872 crore. “If 20 other fund houses launch value-strategy funds, then they will also do what we are trying to, and the price of what we want to buy will go up. For instance, perhaps we won’t have been able to buy metal stocks in 2020 because they wouldn’t have corrected as much if many other value funds would have been chasing them. It would be like the smallcap stocks of today; so many fund houses are buying small and midcaps that nothing is cheap,” adds Naren.