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Returns, not label, matter in funds both value and growth

Fund managers are required to stick to the mandate of funds, but what really defines value?

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A myth which has been around for a long time becomes a reality. In the same way , the perception towards categorizing the funds as growth funds and value funds has been around long enough for us to believe that they exist in reality and behave according to their intended 'value' or 'growth' nature .

What are Value funds? Funds which normally invest in value stocks i.e. the stocks which are characterized by lower price-to-book (P/B) ratios ,Price to Earnings (P/E) and ones which are available below its intrinsic value in addition to paying comparatively higher dividend yield .

What are Growth funds? Funds which invest in growth stocks i.e. companies whose earnings are expected to grow above average industry earnings rate. They are also characterised by higher P/E levels as investors believe that the higher growth rate of the company justifies the higher valuations.

Fund managers are generally required to stick to the mandate of the funds, but what really defines value?

Avenue Supermarts Ltd (D-Mart) which was listed last month is a classic example of perceived 'growth' investing .The stock more than doubled on the opening day and has only gone from strength to strength since. The high valuations have not bogged down investors as ironically, they are seeing 'value' in this 'growth' stock.

Thus, it's safer to conclude that 'Value lies in the eyes of the beholder'

In a study conducted of funds, below were our observations:

The segregation in value and growth category was done on the basis of comparing the current P/E of the fund to P/E of the Sensex (approximately 22). Funds with P/E below and above 22 were accorded value and growth status respectively.

The above data points stated that there was no conclusive evidence to suggest that one outperformed the other.

1. During boom years (2005, 2007, 2014 to name a few), growth funds outperformed the value funds but there were no clear winners if observed across all the funds.

2. During bust years (2008 particularly), value funds evidently took a lesser beating compared to the growth stocks in most of the fund houses.

3. During the bull phase (2003 – 2008), growth funds have shown better performance as can be seen from the table vis-à-vis value funds.

4. During the bear phase (2008 – 2011), value funds have done better in periods with growth funds lagging behind.

Myth No.1:Value Investing requires patience: Any form of investing requires patience. For investors to make high risk-adjusted returns,it takes at least three-five years. When we are talking about stocks giving us returns by posting high profits quarter-on-quarter, we must understand that instead of lazily classifying them as a growth stock,bigger picture needs to be looked at.

Myth No.2: Is India a paradise for both value and growth funds? India is presently in a sweet spot with strong fundamentals and improving fiscal deficit. Funds which invest in opportunities that play on the macro themes such as rural consumption and infrastructure push need to be looked at. Do we classify them as value or growth? For once, let's take a stand of not taking a stand.

Where do we stand globally?

According to thebalance.com, growth stocks tend to perform better in the last year of the business cycle before recession. Growth tends to lose to value when a bear market is in full swing. Neither growth nor value investors can claim an outright victory in performance history.

"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so." – Mark Twain

Countless articles have been written debating value vis-a-vis growth strategies, but is it so important to take a position?

Can't we deduce good investing to investing in funds with skilful managers investing in good businesses, charging minimum fees and having a long-term approach with reasonable capital appreciation?

Like everything else in life, the answers to most difficult questions are simple but not easy.

Be it Howard Marks, Warren Buffett or Peter Lynch, they focus on finding value, regardless of the stock being a 'growth' or a 'value' stock .Value for them means something that they can buy for less than what they believe it's worth and holding it until the world realises the same. They have done it before and it has reasonably worked, hasn't it?

NO YARDSTICK

  1. Fund managers are required to stick to the mandate of funds, but what really defines value?
     
  2. In boom years, growth funds outperformed value funds but there were no clear winners
     
  3. In bust years, value funds were less impacted than growth funds in many fund houses
     
  4. In the bull phase, growth funds have shown better performance
     
  5. In the bear phase, value funds have done better with growth funds lagging behind

The writer is founder and CEO, TBNG Capital Advisers Pvt Ltd

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