“Value investing is about buying a stock when others don’t like it”

ICICI Pru Value Discovery, the fund that has stood its ground with its value investing philosophy, completed 10 years last week. In an interview with FundsIndia, Sankaran Naren, CIO, ICICI Pru AMC, tells us what value investing is all about and how ICICI Pru Discovery successfully used the strategy to build wealth for those who stayed with it.

What is value investing?

The culture of value buying is already prevalent in India, with Indian consumers buying various products in attractive sales and discount offers; with this analogy, value investing could be understood as a style of investing in equities when they are cheap and holding the investments till they become of reasonably value.

Value is often associated with a stock being ‘cheap’? But often times stocks are cheap for a reason. How would you distinguish ‘value’ and ‘cheap’ stocks?

In common investing parlance, a stock available for cheap may be referred to as a value stock, but that may certainly not be true. Rather buying into unreasonably cheap stocks may end up setting a value trap for the investor.

Therefore, we believe one should not seek unreasonably cheap – low price to earnings/ low price to book companies. What we mean by value is buying good companies at discounted prices. Such companies have a good return on equity and return on capital employed, while at the same time pay a higher price to earnings.

Would you agree that growth becomes value and vice versa in different market conditions and there can be no real distinction between the two?

Value and growth are distinctive styles which are complementary, not competing. While there could be overlaps, both the strategies have the potential to co-exist across economies. In the last 9-12 months, value opportunities have been abundant, forming the basis for the launch of our value series. Currently, with an economic revival in the offing, the growth strategy also has the potential to offer reasonable returns to investors over a 3-5 year period.

As such, with value investing, what is required is the intrinsic approach to buying something while others don’t like it. For instance, when our value series was launched, there was a pessimistic attitude in the entire market and investors were wary of equities. In case of growth, however, the strategy is to start investing when things have started to turnaround, and the growth accelerates from there on.

With the Indian market mostly considered to be a ‘growth’ market, does value investing work only in down markets?

It is always possible to find pockets of value across market scenarios. Also, we believe in a concept of relative value. For example, in 2007, we found significant value in the consumer, pharmaceutical and technology sectors.

Therefore, at any point of time, we will be able to find value in something at least relative to the rest. In our opinion, given the way the markets have got integrated, there is a lot of scope to find value at all points of time.

Do investors need to have a mix of growth and value funds in their portfolio or do you think, in the long term, both these strategies tend to converge in terms of what they deliver?

We believe investors should build a portfolio diversified across not only asset classes, but also investment strategies. The two styles complement each other and therefore, investing in a mix of growth and value funds in their portfolio would help create wealth over the long term.

ICICI Pru Value Discovery has completed 10 successful years. Could you share the interesting periods (both best and worst times) for this fund and how you managed the fund in such times?

The fund has performed well across various market phases as it was able to generate excess returns over the benchmark in bull, as well as bear market phases.

For example, when the subprime crisis was underway in 2008-09 and the market became extremely undervalued, the focus was to create a portfolio which could deliver an upside. Also, in 2008 largecaps outperformed small and mid-cap segments. Therefore, we stuck to our small and mid-cap positioning. The benefit of moving towards deep value actually aided the performance of the fund in March 2009 to December 2009, when the fund significantly outperformed the benchmark.

Also, early in 2013, the fund boosted exposure to software stocks and rode out the subsequent rally reasonably well. Auto ancillary is another segment where the fund increased exposure over the past year. The fund’s overweight exposure to software, auto and auto ancillaries sectors helped it outperform the benchmark in the past three years.

We have seen that Value Discovery underperformed a bit in rallying markets up to 2007. However, in the current market rally post September 2013 till date, it has continued to perform well. Has there been a fundamental shift in strategy?

While in 2007, the markets were driven by euphoria, in 2013, only a select few stocks were at their peaks, indicating reasonable valuations across a large range of stocks, thereby offering significant value opportunities.

There has been no fundamental change in the strategy. ICICI Prudential Value Discovery continues to follow the classic principles of value investing to buy stocks at a discount to their intrinsic value. The scheme focuses on identifying value stocks that are likely to transform into tomorrow’s market leaders, resulting in a potential capital appreciation over time.

The fund conducts a rigorous process to identify fundamentally strong well managed companies which are undervalued.
The fund manager may also resort to a contra investing strategy which involves a selection of stocks that are out of favour at a certain point, but have the potential to do well over time, owing to factors such as strong fundamentals, future turnaround in the business cycle and revival in economic growth.

Will your Value Discovery fund have challenges in allocating to midcaps with a growing asset size?

ICICI Prudential Value Discovery Fund is positioned as a multi-cap diversified fund. The fund has allocations to midcaps historically where plenty of value is available. With the growing asset size, the flexibility in mandate will allow the fund to explore opportunities across market capitalizations.

The fund has traditionally been tilted towards midcaps, although it is not positioned as one. Is it a tough proposition to find any value in large caps in the Indian context except in downturns?

In India, if you see the period post 2006, there has been only a short period where mid-caps have done well, i.e., after 2009 and also parts of 2010. Midcaps tend to be out of favour for longer, and therefore, one gets better opportunities in the mid-cap category for such a fund.

To an extent we do see value in large caps. In fact, the top two holdings of ICICI Prudential Value Discovery Fund are large caps.

In our opinion, given the way the markets have got integrated, there is a lot of scope to find value at all points of time. We are finding value in select large caps, particularly in some of the technology large caps because relative to the market, they have become reasonably cheap, i.e., their valuations have not expanded.

Where does Value Discovery see value in the current market?

Indian equities are better positioned because of a robust political scenario backed by improving macro fundamentals like CAD and inflation. We are cautiously bullish on equities and believe that they have good potential of generating reasonable returns over the next 3 years.

However, in the near term, the market seems to be fairly valued and most sectors are trading near their long term average valuations. We expect recovery in the domestic fundamentals as economic growth picks up and reforms gather pace.

Leveraging on the economic revival, domestic cyclicals like infrastructure and banking offer a potential upside in the next 3-5 years.

Disclaimer:

The sector(s)/stock(s) mentioned here do not constitute any recommendation of the same and ICICI Pru may or may not have any future position in these sector(s)/stock(s). Past performance may or may not be sustained in the future. The portfolio of the schemes is subject to changes within the provisions of the Scheme Information document of the schemes. Please refer to the SID for investment pattern, strategy and risk factors.