Long Term Value Fund

Long-term investments in equity mutual funds have the potential to provide good returns and ride out market volatility in the long term. In equity markets, a period of 3 years or more, can be safely described as long-term. Among a variety of sub-categories of equity mutual funds, a Value Fund could be an appropriate choice to invest for the long term.

What are Value Funds?

A Value Fund invests a minimum of 65% of its assets in equity and equity-related instruments by following a value style of investing. While pursuing the value style, the fund could invest across market capitalisation and sectors. The value style of investing focuses on identifying and investing in undervalued stocks that are trading at a price lesser than their intrinsic value. A stock that is trading at a significant discount to its historical average is considered a ‘value buy’; A stock could be undervalued because a large number of investors may not have discovered it yet, or there could be a misperception about the company due to recent events. However, if the company is fundamentally strong, it is likely to overcome any hurdles over time. And consequently, its stock price will begin to re-rate and reflect its actual worth. 

How does a Value Fund go about with its portfolio construction?

A Value Fund for its portfolio construction activity uses a variety of metrics such as the following:

Price to earnings ratio

Price to book value

Price to sales multiple

Price to cash flow

Dividend yield

Earnings Before Interest Tax Depreciation and Amortization (EBITDA)

In addition to the valuation metrics, Quantum Long Term Equity Value Fund also evaluates the following:

The business of the company

The environment in which it operates

The management and their long term goals

Can the financials support these goals?

This helps in understanding the valuations, the margin of safety available, and the future prospects of the respective company under consideration. Moreover, attention is also paid to qualitative aspects such as the circle of competence of the company, whether it has enough economic moat brand value, patenting of its products, the economies of scale at which it operates, the management quality, corporate governance practices and culture, how are minority shareholders treated, among a host of other things. That’s why value investing finds its place in the profound quote, "Beauty lies in the eyes of the beholder" by the Greek philosopher, Plato. A bottom-up approach is usually followed by the professional fund manager/s of a Value Fund.

The bottom-up approach for stock selection of Quantum Long Equity Value Fund

Clients / Investors get best of bottom up ideas with a risk control measurement for each sector < 40 Stock

Portfolio of stocks with broad exposure to various sectors Reflecting three broad themes: domestic consumption, exports and infrastructure

Regular meeting to review ideas and approve value stocks for the database 100 stocks

Analysts study stocks in their sector in India with global comparisons wherever necessary. The universe is generally BSE 200 with flexibility to include new issues. Research includes visit notes, financial models and investment thesis, supplemented with broker research >200 stock

A Value Fund sells its investments mainly when the fund management team believes the market price of the shares has exceeded its assessment of the long-term value of that company, or if there are adverse changes to that company's management, prospects or the markets in which that company operates. This evaluation is again based on the valuation metrics, changes in the qualitative aspects of the respective companies, and the overall equity market scenario.

What are the chances of Value Fund outperforming or underperforming?

As a Value Fund invests in undervalued stocks, some of the investments may not pay off quickly. It could underperform over the short-to-medium term. Likewise, when the market conditions are favouring growth investing or there is a polarised market rally (wherein only a handful of stocks are lifting the benchmark index), a Value Fund’s performance could lag compared to the other sub-categories of equity mutual funds following a growth style. But when the tide turns in favour of value investing, which sees a re-rating of stocks and there is a broad-based rally driven by fundamentals and earnings upgrades, a Value Fund could outperform thus creating value for its investors.

The care to be taken when selecting a Value Fund

Managing a Value Fund requires the fund house to have a deeper understanding to ascertain whether the investment will be truly valuable in the long run. It also requires, at times, the courage to go against the market and take bold calls. When choosing a Value Fund for your mutual fund portfolio, evaluate…

Furthermore, it would serve well to understand the investment ideologies, processes and systems at the fund house. Never make the following mistake when investing in a Value Fund…

Who should invest in a Value Fund?

A Value Fund is suitable for investors with a very high-risk appetite looking for long-term capital appreciation. It is important to keep an investment time horizon of 3 to 5 years or more when investing in Value Fund. Choose a Value Fund carefully, and if in doubt speak to your investment adviser before investing. Be a thoughtful investor.