Short on time? Listen to a brief overview of this week’s review.
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What
- Diversified equity fund that invests in a mix of large-cap and mid-cap stocks
- Follows a strategy of buying into undervalued stocks
Why
- Steady success in identifying undervalued themes
- Moves across market-cap segments to find value
- Strong long-term performance
For whom
- Moderate and high-risk investors with at least a 5-year view
- Investors willing to take phases of underperformance arising from a value strategy
ICICI Prudential Value Discovery has long been an investor favourite. From a size of Rs 2,000-odd crore in 2013, the fund is now a giant Rs 17,568 crore. Despite its large size and recent underperformance (its one-year return of 10.3% is below both the 18.3% diversified fund average and the 17.9% of the Nifty 500, its benchmark), we think it remains a good investment option for three reasons.
One, it suits the current market scenario well.
In the current market, with valuations well ahead of earnings growth for several sectors and stocks, a value-focused approach can be a judicious one for fresh investments into the market now. Value Discovery is a pure value fund, considering metrics such as price-to-book value, price-to-earnings, long-term risk-reward proposition, management quality to zero in on sectors and stocks. In addition, the value focus is not just in stock selection. It shifts between market capitalisation segments to seek value.
So while the fund was a mid-cap focused one in earlier years, it increased allocations towards large-cap funds from 2015 onwards, thus morphing into a diversified fund. From mid-caps accounting for about half the portfolio in 2014, the fund held less than a third in such stocks by early 2016. With mid-caps still showing no signs of letting up their heated rally, the fund continued to find value in the large-cap segment. Since January this year, mid-caps made up around 17% only of the portfolio. Large-cap stocks have averaged 74%. Going by market cap orientation, the fund could well be a large-cap one today.
This ability to move where value is, sets the fund apart from its peers. There aren’t many truly value-focused funds; others usually mix growth and value stocks to keep returns higher.
Two, it has shown the ability to call value correctly in the past.
Following a value strategy means that the portfolio can be contrary to the prevailing market sentiment. Further, once a stock that the fund holds hits uncomfortable valuations, the fund would begin booking out. This may result in the fund not capturing further upside in such a stock.
For Value Discovery, current holding in software and pharmaceuticals at high levels has dragged 1-year returns. The fund also has a higher single-stock exposure within these sectors, amplifying the impact of a poor stock run in these sectors. For example, Sun Pharmaceuticals forms a good 8.9% of the portfolio. The stock is down 40% in the past year. Similarly, Wipro is another top holding at 7.7% of the portfolio. The stock’s 4% one-year return is well short of the Nifty 500 or even the Nifty 50.
Value Discovery is one of the few funds that is not overweight on banking, holding just a few quality ones such as HDFC Bank, Kotak Mahindra Bank, and SBI. Another reason dragging recent performance is its avoidance of favourite auto stocks, preferring instead the more beleaguered Mahindra & Mahindra and Tata Motors. It holds a good share of logistics, which can work well in the long term after benefits of the new tax structure kicks in.
In earlier years, the fund’s value calls have usually worked. It wasn’t big on financial services in 2012, when the sector rallied smartly. It added to it in 2013, when banking was troubled. This paid off in the massive rally that took place in the following years. The fund picked up energy stocks well ahead in 2011 shuffling between power, oil and gas, and petroleum products gaining through the rallies in 2014 and 2016. It added to agrochemical stocks in 2014, gained from this in 2015 and 2016 and pruned it back now.
It is not that Value Discovery doggedly holds on to picks regardless of developments. Where it does not see the value panning out, it scales back or books out. For example, it pulled out of Bharti Airtel, which it had added to last year, as the sector and stock troubles deepened.
Three, its long-term performance is strong.
Rolling 5-year returns since the fund’s inception has it beating diversified funds and the Nifty 500 all the time. The average extent to which it has outperformed diversified funds is a good 6%, though some of this is attributable to the fund’s earlier mid-cap bent. It has not delivered negative returns in any five-year period. Value Discovery maintains this good long-term record even when stacked up against midcap funds in the same period, beating the mid-cap average 92% of the time.
Value Discovery’s performance record in correcting markets is also strong. In the 2008 and 2011 downturns, the fund did better than mid-caps and diversified funds – and the fund was more mid-cap focused at these times. In the sideways 2013 market too, the fund did far better than other mid-cap funds.
Despite the poor 1-year performance, the fund’s risk-adjusted return (measured by Sharpe) is well above the category average. Its Sortino ratio, which measures deviations on the downside, also holds above average.
Suitability
Its often contrarian portfolio introduces diversification to an investor’s portfolio. But its value stance and chances of underperformance from time to time make it suitable for investors who have perseverance to hold through phases of underperformance. A longer holding period of at least 5 years is required for the fund to deliver. Investing through SIPs in this fund is ideal. The fund’s manager is Mrinal Singh.
FundsIndia’s Research team has, to the best of its ability, taken into account various factors – both quantitative measures and qualitative assessments, in an unbiased manner, while choosing the fund(s) mentioned above. However, they carry unknown risks and uncertainties linked to broad markets, as well as analysts’ expectations about future events. They should not, therefore, be the sole basis for investment decisions. To know how to read our weekly fund reviews, please click here.
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I think last five years Return Of this fund is not relevant because the return of the then midcap fund is included. Now it is a multicap fund and it is adhering to a new benchmark and even if it proves to be flexicap when valuation in midcap will be cheaper, I don’t think it will again go back to the midcap benchmark and having the largest AUM, may not be the midcap fund and give high returns as before.
Hello,
We’re not taking simple 5-year returns – its rolling returns over a period of several years. As you’ve pointed out, its now a multi-cap fund. We’ve noted this in the section on performance and we’ve compared returns to both diversified and mid-cap funds. Yes, the fund may not see its formerly high returns because it’s moved out of mid-caps now. If midcaps correct more than large-caps and turn attractive, then the fund could well move a portion of its portfolio there, even if it’s a large fund. It’s mandate allows it to go wherever there is value.
Thanks,
Bhavana
Dear Bhavana,
Why are you recommending this fund, when we have many choices in Diversified funds ? Even for 5 year performance, there are many funds. I don’t understand your point. Can you please explain ?
Thanks
Yathavamoorthy
Hello,
The reasons for recommending this fund is explained in detail in the article itself. Looking at a fund only by five-year returns, or 1-year, or 3-year return is not something we do. A fund that is underperforming at this time doesn’t automatically mean that others are better. A fund doesn’t have to be the best every single time for it to be a good fund. What makes a fund suitable or not is a mix of consistency in returns, how well it is able to beat the market and peers, its strategy and the sustenance of this strategy in delivering returns, ability of the fund to perform across markets and so on. So while there are diversified funds that are returning higher today, it depends on what drove that performance and its history of delivering higher returns too.
Thanks,
Bhavana
I think last five years Return Of this fund is not relevant because the return of the then midcap fund is included. Now it is a multicap fund and it is adhering to a new benchmark and even if it proves to be flexicap when valuation in midcap will be cheaper, I don’t think it will again go back to the midcap benchmark and having the largest AUM, may not be the midcap fund and give high returns as before.
Hello,
We’re not taking simple 5-year returns – its rolling returns over a period of several years. As you’ve pointed out, its now a multi-cap fund. We’ve noted this in the section on performance and we’ve compared returns to both diversified and mid-cap funds. Yes, the fund may not see its formerly high returns because it’s moved out of mid-caps now. If midcaps correct more than large-caps and turn attractive, then the fund could well move a portion of its portfolio there, even if it’s a large fund. It’s mandate allows it to go wherever there is value.
Thanks,
Bhavana
Dear madam, you are right that all the fund can’t be in number one position all the time.. There will be up and down but at the same time we have to see benchmark
Thanks
Hello,
Yes, you’re right, one has to see the benchmark. And we have compared it against the benchmark as well, when we’re looking at consistency and its ability to outperform. The fund has not done well in the one-year period, against both benchmark and category, for reasons we’ve explained in the article. But given the strategy of the fund, such lagging can be expected. When we’re looking at returns, it’s long-term performance that we see and the ability of the fund to call value correctly. The fund has shown this ability. As we’ve also explained in the article, the fund has earlier reversed calls when it looks like it will not pan out as expected. Even in such a case, some underperformance can happen.
Thanks,
Bhavana
Dear madam, you are right that all the fund can’t be in number one position all the time.. There will be up and down but at the same time we have to see benchmark
Thanks
Hello,
Yes, you’re right, one has to see the benchmark. And we have compared it against the benchmark as well, when we’re looking at consistency and its ability to outperform. The fund has not done well in the one-year period, against both benchmark and category, for reasons we’ve explained in the article. But given the strategy of the fund, such lagging can be expected. When we’re looking at returns, it’s long-term performance that we see and the ability of the fund to call value correctly. The fund has shown this ability. As we’ve also explained in the article, the fund has earlier reversed calls when it looks like it will not pan out as expected. Even in such a case, some underperformance can happen.
Thanks,
Bhavana
Hello,
I am investing in value discovery from last one year and I agree with your views. I am wondering why this name is not there in your prescribed MF select fund list ?
Hello! The fund is a part of the Select list – it’s listed under the high-risk equity funds set.
Thanks,
Bhavana
So among three multi cap funds with a horizon of 20 years SIP
1. Franklin India Prima Plus Fund
2. HDFC Equity
3. ICICI Value Discovery Fund
which one you recommend for moderate to aggressive investor and why
All three AMC houses hold great track record.
Hello,
Each fund has a completely different method of stock selection and management, as well as performance records. For example, HDFC Equity is a highly volatile fund. Franklin Prima Plus is a steady performer and mixes mid-caps with large. IPru Value Discovery is entirely value. Which to go for depends on what other funds (if any) you hold in your portfolio and your horizon. In any case, please route fund-specific queries through your advisor (available from your Dashboard if you’re a FundsIndia investor). We won’t be able to provide such specific advice on this forum.
Thanks,
Bhavana
Sure. so with a 20 year horixon and with moderate to aggressive risk – we can consider ICICI value or FIPP
appreciate your views
which category of risk does Ipru fund falls
Hi,
IPru Value Discovery is a diversified or multicap fund, and requires high risk.
Thanks,
Bhavana
So among three multi cap funds with a horizon of 20 years SIP
1. Franklin India Prima Plus Fund
2. HDFC Equity
3. ICICI Value Discovery Fund
which one you recommend for moderate to aggressive investor and why
All three AMC houses hold great track record.
Hello,
Each fund has a completely different method of stock selection and management, as well as performance records. For example, HDFC Equity is a highly volatile fund. Franklin Prima Plus is a steady performer and mixes mid-caps with large. IPru Value Discovery is entirely value. Which to go for depends on what other funds (if any) you hold in your portfolio and your horizon. In any case, please route fund-specific queries through your advisor (available from your Dashboard if you’re a FundsIndia investor). We won’t be able to provide such specific advice on this forum.
Thanks,
Bhavana
Sure. so with a 20 year horixon and with moderate to aggressive risk – we can consider ICICI value or FIPP
appreciate your views
which category of risk does Ipru fund falls
Hi,
IPru Value Discovery is a diversified or multicap fund, and requires high risk.
Thanks,
Bhavana
OK. Noted. So depending upon the risk, we can still consider investing in top rated small cap funds with a same horizon rather than multi cap funds Chances of capital appreciation are 2x or 3x than diversified funds.
L&T Emerging Business or Franklin India Smaller Cos Fund(G)
Hello,
You can consider small-cap funds if you are comfortable with returns dropping sharply and rising fast – ie, returns will be volatile. It also requires very high risk. Note that it’s best not to put more than 10-15% of your portfolio in such funds. You need to hold a diversified, asset-allocated portfolio which combines different fund categories depending on your needs. Please talk to your advisor before choosing funds, in order to understand what risk you’re taking on and to build an appropriate portfolio.
Thanks,
Bhavana
Noted. Great value feedback.
Among large cao funds, why do you think HDFC Top 200 or Kotak Classic Equitty is not in your list. If some one is already invested, should one continue if horizon is 25 years or one should move to Franklin India Bluechip or Mirae Asset.
Hi Umesh,
HDFC Top 200 can go through prolonged periods of underperformance, because they can take contrarian and long-term calls and stick to it. It requires a very calm approach to holding it and a strong ability to weather the underperformance. Kotak Classic doesn’t do well in beating its category, whether in the short term or long term. Whether to hold or add the funds you mentioned depends on the rest of your portfolio, if you hold other mutual funds.
Thanks,
Bhavana
OK. Noted. So depending upon the risk, we can still consider investing in top rated small cap funds with a same horizon rather than multi cap funds Chances of capital appreciation are 2x or 3x than diversified funds.
L&T Emerging Business or Franklin India Smaller Cos Fund(G)
Hello,
You can consider small-cap funds if you are comfortable with returns dropping sharply and rising fast – ie, returns will be volatile. It also requires very high risk. Note that it’s best not to put more than 10-15% of your portfolio in such funds. You need to hold a diversified, asset-allocated portfolio which combines different fund categories depending on your needs. Please talk to your advisor before choosing funds, in order to understand what risk you’re taking on and to build an appropriate portfolio.
Thanks,
Bhavana
Noted. Great value feedback.
Among large cao funds, why do you think HDFC Top 200 or Kotak Classic Equitty is not in your list. If some one is already invested, should one continue if horizon is 25 years or one should move to Franklin India Bluechip or Mirae Asset.
Hi Umesh,
HDFC Top 200 can go through prolonged periods of underperformance, because they can take contrarian and long-term calls and stick to it. It requires a very calm approach to holding it and a strong ability to weather the underperformance. Kotak Classic doesn’t do well in beating its category, whether in the short term or long term. Whether to hold or add the funds you mentioned depends on the rest of your portfolio, if you hold other mutual funds.
Thanks,
Bhavana
Bhavna,
I am a self employed person. I have been investing in ICICI Prudential value discovery fund through STP since last year. I am 48years old and want to invest in this fund till 60 years for retirement corpus. Am I on right track? If not suggest some good funds.
Thanks
Hello,
Yes, an STP is a good way to invest, especially in this market. You have also given enough time for your investment to grow. If this is the only fund you hold, please add more funds as and when your surplus allows you to (or you can do so immediately if you can). This will ensure that you hold funds that follow different strategies or different market segments, which rounds out your portfolio better and spreads out the risk. Please talk to your advisor to understand how to build a diversified portfolio if you require help on the same.
Thanks,
Bhavana
Bhavna,
I am a self employed person. I have been investing in ICICI Prudential value discovery fund through STP since last year. I am 48years old and want to invest in this fund till 60 years for retirement corpus. Am I on right track? If not suggest some good funds.
Thanks
Hello,
Yes, an STP is a good way to invest, especially in this market. You have also given enough time for your investment to grow. If this is the only fund you hold, please add more funds as and when your surplus allows you to (or you can do so immediately if you can). This will ensure that you hold funds that follow different strategies or different market segments, which rounds out your portfolio better and spreads out the risk. Please talk to your advisor to understand how to build a diversified portfolio if you require help on the same.
Thanks,
Bhavana
Dear Bhavana,
Why are you recommending this fund, when we have many choices in Diversified funds ? Even for 5 year performance, there are many funds. I don’t understand your point. Can you please explain ?
Thanks
Yathavamoorthy
Hello,
The reasons for recommending this fund is explained in detail in the article itself. Looking at a fund only by five-year returns, or 1-year, or 3-year return is not something we do. A fund that is underperforming at this time doesn’t automatically mean that others are better. A fund doesn’t have to be the best every single time for it to be a good fund. What makes a fund suitable or not is a mix of consistency in returns, how well it is able to beat the market and peers, its strategy and the sustenance of this strategy in delivering returns, ability of the fund to perform across markets and so on. So while there are diversified funds that are returning higher today, it depends on what drove that performance and its history of delivering higher returns too.
Thanks,
Bhavana
Hello,
I am investing in value discovery from last one year and I agree with your views. I am wondering why this name is not there in your prescribed MF select fund list ?
Hello! The fund is a part of the Select list – it’s listed under the high-risk equity funds set.
Thanks,
Bhavana