Finding the True-to-Label Value Fund: A Comparison Guide for Different Investment Styles

Value investing is a tried-and-tested approach to building wealth in the stock market. This style of investing can be an effective strategy for those seeking long-term growth and stability in their portfolio. But within the broad umbrella of equity investing, there are distinct styles that cater to different risk tolerances and investment horizons.

This article compares various equity investing styles such as deep value, contrarian, and more, and explores their suitability for different investor preferences.

What is Value Investing?

Value investing is an equity investing strategy that involves buying stocks with strong fundamentals that are undervalued relative to their intrinsic worth. The focus is to purchase these stocks at a discount and hold them until their value is recognized by the market, resulting in capital appreciation.

1. Deep Value:

• Investment Style: Deep value investing focuses on out-of-favor stocks, often those facing temporary challenges or industry downturns. These stocks may be trading at a significant discount to their book value or earnings potential. Deep value investing requires patience, as the market may take time to recognize the intrinsic value of these stocks.
• Suitability: Deep value investing is ideal for investors who are:
1. Comfortable with higher levels of volatility & uncertainty and
2. Have a long-term investment horizon (10+ years).
3. Patience and the ability to withstand market volatility as the turnaround process for deeply undervalued stocks can be slow.

2. Contrarian Value:

• Investment Style: Contra funds take a contrarian approach to investing by going against the prevailing market sentiment. It can be a subset of value investing. This style of investing actively seeks out off-beat stocks that are currently out of fashion or disliked by investors but have strong fundamentals. This contrarian approach believes that market sentiment often leads to mispricing, presenting buying opportunities, that can eventually realize their value.
• Suitability: Contrarian value investing can be even riskier than deep value, as it requires a strong conviction and are suitable for:
1. Investors with the ability to bear short-term losses.
2. Investors with a long-term perspective.
3. Investors who are willing to go against the crowd and have a contrarian mindset.

3. Growth at Reasonable Price (GARP):

• Investment Style: GARP style seeks to invest in companies that exhibit both value and growth characteristics. These styles look for companies with reasonable valuations relative to their growth prospects. GARP style avoids overvalued stocks while still participating in the potential upside of growth stocks. They look for stocks that are undervalued but also exhibit strong growth characteristics like a healthy market share or a dominant product line.
• Suitability: Investors seeking a good balance between value and growth potential, combining elements of value and growth.
• Investors who are willing to pay a slightly higher valuation for companies with strong growth potential.

Choosing the Right Value Fund:

Consider these factors when selecting a value fund:

• Evaluate the investment strategy employed by the fund.
• Examine the current and historical portfolio characteristics to ensure adherence to value investing principles.
• Assess whether the fund manager demonstrates conviction in holding the portfolio or engages in momentum-based strategies.
• Analyze the fund's performance over various timeframes, including 3 years, 5 years, 7 years, and since inception, to gauge consistency of performance.
• Consider the fund's performance across different market cycles to understand its resilience.
• Review the risk-adjusted returns generated over the long period to assess efficiency.
• Take into account the expense ratio to understand the cost implications.

In addition to the stock fundamentals such as price to earning ratio (P/E ratio), price to book value (P/BV), EBIDTA (Earnings Before Interest Tax Depreciation and Amortization), Dividend Yield, Quantum Long Term Equity Value Fund also evaluates the qualitative aspects such as:

• The business of the company
• The environment in which it operates
• The management and their long term goals
• Can the financials support these goals?

Moreover, attention is also paid to management quality, corporate governance practices and culture, how are minority shareholders treated, among a host of other things. Therefore, when selecting a value fund, care need to be taken to invest in a true-to-label value fund that carries strong fundamentals with qualitative aspects such as sound governance standards.

Above article is authored by Quantum.

View All