Value buying may mean different things to different people.
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A housewife bargaining with the green-grocer while buying vegetables for the right price;
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A lady looking for a huge discount on that lovely dress, before deciding to buy it;
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A youngster flipping through various e-commerce app, to get the best deal on his shortlisted mobile phone;
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A diamond merchant carefully evaluating the cuts of diamonds to estimate its true value, before quoting a price for it.
In each of the scenario above, one is looking for the best bargain before spending their hard earned money and aim to reduce the risk of paying anything more than the true worth of the product.
Similarly value investing too means investing your hard earned money at the best price or at a discounted price that can offer you a decent margin of safety.
Price is what you pay. Value is what you get. ~ Warren Buffet
This popular quote by the legendary investor Mr Warren Buffet suggests that price and value are not always the same. And thus value investors benchmark their purchase with something known as intrinsic value. The intrinsic value is an important principle in value investing, but is difficult to estimate. Even with a same set of information, two different investors may value a company or a stock differently. Thus to reduce the risk of error of estimation in intrinsic value, it is important to look for a decent margin of safety.
Value investing is a long term strategy, which may be boring; especially for those category of investors looking to make some quick gains. It really requires a lot of courage and discipline to follow value investing. And thus many investors shy away from value investing.
ICICI Prudential Value Discovery Fund is one such fund that follows the principles of value investing. As the name suggests, the fund aims to discover stocks that are trading at a discount to their intrinsic value. This value-oriented scheme has lived up to its name, picking undervalued stocks that have helped it deliver noticeable gains over the long term. ICICI Pru Value Discovery Fund has retained its value style and has been categorized under Value Funds. It follows bottom up approach to pick fairly discounted stocks that have potential to deliver exceptional returns over long term.
With a corpus of over Rs 16,650 crore, ICICI Pru Value Discovery Fund is the largest fund in the value funds category. With growing corpus and rising valuation in the mid cap space, the fund transformed itself from a mid-cap oriented fund, to a multi cap fund with a large cap bias. To reflect its multi-cap character, the fund also changed its benchmark (in November 2015) from the CNX Midcap Index to S&P BSE 500 Index. ICICI Pru Value Discovery Fund has a stable fund management at the helm, with Mr Mrinal Singh managing the fund for over 7 years now and has steered the fund through multiple market cycles. With value style being out of favour in the growth oriented overvalued markets, true value style funds have been going through a rough phase for quite some time.
Fund Facts – ICICI Pru Value Discovery Fund
| Category |
Value Funds |
Style |
Value |
| Type |
Open ended scheme |
Market Cap Bias |
Multi Cap |
| Launch Date |
16-Aug-04 |
SI Return (CAGR) |
21.45% |
| Corpus (Cr) |
Rs 16,659 |
Min./Add. Inv. |
Rs 1,000 / Rs 500 |
| Expense Ratio (Dir/Reg) |
1.2% / 2.09% |
Exit Load |
1% |
Portfolio Data as on July 31, 2018.
SI Return as on August 28, 2018.
(Source: ACE MF)
Growth Of Rs 10,000, Invested In ICICI Pru Value Discovery Fund 5 Years Ago
Data as on August 28, 2018
(Source: ACE MF)
Despite slowdown in its performance over the last few years, the long term returns generated by ICICI Pru Value Discovery Fund still looks enticing. Over the last 5 years, the fund has generated a compounded annualised return of around 27%, as against 21% CAGR by its benchmark S&P BSE 500 - TRI. An investment of Rs 10,000 in the fund five years back would have more than tripled to Rs 33,281, while a similar investment in its benchmark would have been valued at Rs 26,112. The funds focus on undervalued stocks in the mid cap segment helped it generate substantial alpha till the time midcaps entered the over-valued zone and the fund switched focus towards large caps in its hunt for value.
ICICI Pru Value Discovery Fund: Year-on-Year Performance
*YTD as on August 28, 2018
(Source: ACE MF)
The historical track record of ICICI Pru Value Discovery Fund is majorly backed by its strategies in the mid and small cap segment. After constantly beating its benchmark index by a significant margin till 2015, the fund has struggled to match the returns of its benchmark in the last 2 calendar years. In CY 2017, the fund underperformed its benchmark by an absolute margin of over 12 percentage points. Notably its resistance from investing in overvalued mid-caps resulted in its first year of underperformance.
It is worth appreciating the fact that the fund manager chose to underperform, rather than compromising on the value buying philosophy of the fund. The strict adherence to the mandate helped ICICI Pru Value Discovery Fund (+4.5%) find itself in the list of selected value funds that are in green in the current calendar year. Its top ranking peers like Aditya Birla SL Pure Value Fund (-13.1%), IDFC Sterling Value Fund (-4.5%), L&T India Value Fund (-2.3%), Reliance Value Fund (-2.1%) have taken a significant hit in the current calendar year due to their thirst of making returns on the back of midcap rally, despite extreme valuations.
ICICI Pru Value Discovery Fund: Performance Vis-à-vis Category Peers
Returns are on a rolling basis and those depicted over 1-Yr are compounded annualised.
Data as on August 28, 2018
(Source: ACE MF)
*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.
In the rally driven by growth-oriented midcap and small caps (in CY 2016 & 2017), the investment style followed by ICICI Pru Value Discovery Fund had been completely out of favour. Moreover, its resistance from investing in midcaps at high valuation and maintaining a large cap biased portfolio resulted in slowdown in its performance. The fund significantly underperformed its peers that carry substantial weightage to midcaps in their portfolio. Over 3 year rolling periods the fund has trailed the benchmark by 1.5 percentage points, while on 1 year and 2 year rolling basis, the margin of underperformance has widened to 5 to 8 percentage points. However on longer rolling periods of 5 years, the fund has outperformed the benchmark S&P BSE 500 Index – TRI by about 6 percentage points.
A feature that differentiates ICICI Pru Value Discovery Fund from the peers is its ability to limit downside risk. In the current calendar year it stands strong in the list of selected value funds that are in green. With a Standard Deviation of 11.75, the fund is less volatile than the benchmark (13.31) and many of its category peers. However, the underperformance over last couple of years has severely impacted its risk-adjusted returns as well. While the long term performance track record and lower volatility of ICICI Pru Value Discovery Fund can still give some confidence to investors, it is to be seen if the change of tide in mid and small caps, supported by the rally in large caps can help the fund improve on the risk-adjusted returns front and regain its spot in the list of top performers.
Investment Strategy of ICICI Pru Value Discovery Fund
Being a value style fund, ICICI Pru Value Discovery Fund endeavours to invest in stocks of companies available at a significant discount to their fair valuation. It defines value stocks as those, which have attractive valuations in relation to earnings or book value or current and/or future dividends. The fund adopts a "Bottom-up" strategy, to identify and select undervalued stocks based on an evaluation of several parameters such as earnings, asset value, free cash flow, dividend yield, etc. Management, business competitiveness and growth prospects of companies are a few other aspects considered by the fund manager.
ICICI Pru Value Discovery Fund - Portfolio Allocation and Market Capitalisation Trends
Holdings (in %) as on July 31, 2018
(Source: ACEMF)
Until a few years back, ICICI Pru Value Discovery Fund held high allocation in mid-caps given its attractive valuation. However, with rising valuation in midcaps, and large caps offering more value, it significantly increased exposure to large caps (from around 25-30% in early 2014 to around 75-80% at present). Currently ICICI Pru Value Discovery Fund follows multi-cap strategy and remains focussed on identifying under-valued stocks across market cap segment. Over the past one year, the large-cap allocation in the funds portfolio has ranged between 75%-80%, while the allocation to mid and small caps has deviated between 10%-20%. The fund has adopted a cautious approach.
ICICI Pru Value Discovery Fund – Top Portfolio Holdings
Top 10 Stocks
| Stocks |
% of Assets |
| Sun Pharmaceutical Industries Ltd. |
11.20 |
| Infosys Ltd. |
6.36 |
| Wipro Ltd. |
5.79 |
| Mahindra & Mahindra Ltd. |
5.40 |
| NTPC Ltd. |
4.64 |
| ITC Ltd. |
4.21 |
| Power Grid Corporation Of India Ltd. |
4.14 |
| State Bank Of India |
3.60 |
| Indian Oil Corporation Ltd. |
3.21 |
| Exide Industries Ltd. |
3.19 |
|
Top 5 Sectors
|
| Holdings (in %) as on July 31, 2018 (Source: ACEMF) |
In terms of portfolio holdings, ICICI Pru Value Discovery Fund holds a well-diversified portfolio of about 40 stocks spread across market caps. Despite massive increase in AUM, the number of holdings in the fund’s portfolio shrunk from around 50 stocks in the first half of 2016 to 39 stocks at present. No wonders, in an overvalued zone, it is difficult to find new ideas. Sun Pharma, Infosys, Wipro, Mahindra & Mahindra and NTPC have been amongst the prominent names in the fund’s portfolio.
Taking few contrarian bets, ICICI Pru Value Discovery Fund invests in stocks and sectors that are temporarily out of favour and available at reasonable valuations. Currently the fund’s portfolio is inclined towards Infotech and Pharma, followed by Power, Banking and Auto. While the top 5 sectors in the fund’s portfolio remain more or less the same, the fund has increased its exposure to Power, I.T., Media & Entertainment, Pharma and Auto and has been reducing exposure to Engineering, Financials, Oil & Gas and Construction. The funds exposure to undervalued and defensive sectors helps it limit the downside well in case of significant correction.
Major Gainers: The holdings in the ICICI Pru Value Discovery Funds portfolio have shown mixed trend, in the last one year. Stocks like Infosys, Mahindra & Mahindra, Persistent Systems, Exide Industries, Kotak Mahindra Bank and HDFC Bank have been amongst major gainers in the portfolio that appreciated in the range of 20-35%. Mindtree although a small contender in the portfolio was up over 95%, in a year’s time.
Major Losers: Among the list of losers, the fund held Tata Motors, Gateway Distriparks, The Jammu & Kashmir Bank, Bharat Electronics, The Great Eastern Shipping Co., Karur Vysya Bank and Gujarat Pipavav Port, that lost 20%-40% of their value. However, the fund has hardly held over 1% exposure in some of these stocks.
Suitability of ICICI Pru Value Discovery Fund
ICICI Pru Value Discovery Fund is a true to label value-style fund that has a great long-term track record to its credit. However, the fund managers’ preference for value and safety in large caps over momentum returns in high value oriented midcaps resulted in its underperformance over the benchmark and category peers over the last few years. As ICICI Pru Value Discovery Fund is currently biased towards large-cap stocks, one should keep their return expectation reasonable. The fund may not deliver returns as it used to with a mid-cap heavy portfolio. Although the fund is anchored by valuation parameters, it still has flexibility to add significant exposure to mid-caps if valuations become attractive and offer value buying opportunity in this segment. While its prolonged underperformance over the last few years may be a concern, the funds value investing style deserves time. While looking for value funds, one should evaluate and select the funds carefully and give the investment decent time to grow.
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Note: This write up is for information purpose and not a recommendation to buy or sell the mutual fund scheme. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your financial planner or investment advisor.
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