Consider a long-term client who expresses anxiety because his Large Cap fund, which holds established, dividend-paying public sector banks, is trailing a momentum-driven index fund during a market rally. The client worries that his manager is stuck with ‘dull’ stocks, while the market clearly favors high-growth, high-valuation technology companies. As an MFD, you must clarify that the manager is practicing a value-oriented strategy, which prioritizes intrinsic value over current market hype.
This requires patience, as value stocks often wait for the market to correct its pricing errors and acknowledge their true worth.
Value investing operates on the principle of buying assets at a discount to their intrinsic value, often characterized by low Price-to-Earnings (P/E) or Price-to-Book (P/B) ratios. In the Indian context, this might involve identifying a well-established manufacturing company with solid cash flows that has been hammered due to a temporary sector-wide downturn.
Unlike growth investors who pay a premium for future earnings expansion, value-focused managers look for companies with a ‘margin of safety.’ They bank on the fact that if a company is fundamentally sound, the market will eventually revert to a mean, pushing the stock price closer to its fair valuation.
For an MFD, the challenge lies in managing expectations during the ‘underperformance’ phase. If a Value-themed fund underperforms for two or three quarters, clients often pressure you to switch. Here, your value lies in explaining that the fund’s strategy is inherently contrarian. By maintaining the client’s conviction in a fundamentally sound portfolio, you provide the behavioural coaching they need to avoid redeeming at the bottom.
While direct plans offer a lower expense ratio, the cost of an impulsive redemption caused by a lack of expert guidance far exceeds any minor saving in annual fees.
When you select a scheme for a conservative investor who seeks lower volatility, understanding the manager’s value style is crucial. Value funds generally display lower downside risk compared to growth funds because the stocks are already ‘cheap,’ meaning they have less room to fall. However, this also means they may lag behind in aggressive bull markets. Your role is to bridge this gap, ensuring the client views the fund as a structural component of their portfolio, rather than a speculative bet on short-term market trends.
Nuance
Check Your Understanding
A fund manager focusing on ‘Value’ stocks in India would typically prioritize which of the following metrics when evaluating a company?
Why might a Value-style fund underperform during a strong, broad-based market rally?
This is a companion read for Section 10.3 — Drivers of Returns and Risk in a Scheme from Ace the NISM Mutual Fund Distributors Exam by Akhilesh Gururani, available on Amazon Kindle.
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