Fund Focus: L&T India Value Fund

Industry's most consistently outperforming diversified equity fund

Venugopal Manghat, Head Equities, L&T MF

9th Jun 2017

In a nutshell

L&T India Value Fund occupies the No.1 slot in WF's Performance Consistency Report in the diversified equity funds category over a 5 year period - this is a report that measures outperformance vs peers Y-o-Y to determine the most consistent outperformer. While that is no mean achievement in itself, could it be that value is now giving way to growth as the cyclical recovery takes root? Venugopal takes us through the construct of the fund and its strategy to showcase why he remains confident that his fund can maintain its winning ways, through market cycles.

What do percentiles and their colours signify?

Fund performance is typically measured against benchmark (alpha) and against competition. Performance versus competition is measured through percentile scores - ie, what percentage of funds in the same category did this fund beat in the particular period?

If a fund's rank in a year was 6/25 it means that it stood 6th among a total of 25 funds in that category, in that period. This means 5 funds did better than this fund. In percentile terms, it stood at the 80th percentile - which means 20% of funds did better than this fund, in that particular period. If, in the next year, its rank was 11/26, it means 10 other funds out of a universe of 26 did better than this fund - or 38% of funds did better than this one. Its percentile score is therefore 62% - which signifies it beat 62% of competition.

Most fund managers aim to be in the top quartile (75 percentile or higher) while second quartile is also an acceptable outcome (beating 50 to 75% of competition). What is generally not acceptable is to be in the 3rd or 4th quartiles (beating less than 50% of competition). Accordingly, we have given colour codes aligned with how fund houses see their own percentile scores. Green colour signifies top quartile (percentile score of 75 and above), yellow or amber signifies second quartile (percentile scores of 50 to 74) and red signifies 3rd and 4th quartile performance. A simple visual inspection of colour codes can thus give you an idea of how often this fund has been in the top half of the table and how often it slips to the bottom half. A great fund performance is one which has only greens and yellows and no reds - admittedly a tall ask!

WF: Your fund ranks No.1 among diversified equity funds over a 5 year period in our Performance Consistency Report, signifying consistently high Y-o-Y performance: congratulations! To what will you attribute this laudable consistency in top quartile performance year after year?

Venugopal: I believe the consistency in performance of the fund is largely on account of our stock selection, which is a result of (a) our experienced investment team and (b) our strong focus on investment process and risk management. Our bottom-up investment approach with focus on investing in undervalued businesses has aided in significant alpha generation. Moreover, we have a very flexible approach in terms of fund's exposure to sectors and market cap segments which help us explore value investment opportunities across the market spectrum.

WF: There is a growing belief that as the cyclical recovery gains momentum, value style may take a backseat and growth style may assume leadership. Do you subscribe to this notion? How might such an eventuality impact future returns from this fund?

Venugopal: We look at valuation of a stock vis-Ã -vis its (a) earnings growth prospects, (b) historical long period valuation, and (c) relative valuation compared to peers, (d) market valuation, (e) dividend and cash flow yields, (f) investments in the balance sheet etc. Therefore, I believe it is inappropriate to think that value style would take a backseat. I believe a value style fund could do well across all market phases. Growth is one of the ways of unlocking value if you can identify and invest in the right stocks at an appropriate discounted valuation. For this, one may need to look at a large number of stocks across all market cap range as the recovery progresses. In any stage of the market all stocks do not perform in a similar manner and some stocks correct which may be an opportunity. Hence, according to me, the cyclical recovery may not impact the performance of the fund.

WF: Many experts are fretting about stretched market valuations. In this context, which are the pockets where you continue to find value?

Venugopal: One needs to look at stock valuations in conjunction with potential earnings prospects of the businesses over the medium to long term. While, the current market valuations at the headline index level may not be cheap, I believe if you are a stock picker with a long term investment horizon, value investment opportunities do exist, especially if you do not have any market cap restrictions. I think there are select stocks in a number of sectors that offer value by virtue of the cyclical nature of the business. Here, one would like to understand and visualise the improvement that is possible in the fundamentals, given the past trends. There are sectors where the reforms being undertaken by the government may impact positively over time and thus offer value over a three year period. There are stocks where subsidiaries are doing well and may unlock value over time. Also, there are stocks which are in correction mode due to poor quarterly performance or other reasons. For spotting value, one needs to be much more stock specific instead of looking at broader market segments or sectoral trends.

WF: How are you shaping your portfolio in terms of themes and sectors to remain true-to-label and yet maintain your winning streak?

Venugopal: As mentioned earlier, stock selection in this fund is done on a bottom up basis and therefore themes or sectoral exposures have less relevance. We are market cap agnostic in this fund and therefore I tend to explore investment opportunities across the market spectrum with focus on identifying undervalued businesses. While we were quite overweight in mid and small cap space historically given the attractive valuations, we now have a more balanced exposure across market cap segments. I still believe there are many opportunities for bottom-up stock pickers in the small and midcap space that has potential to deliver strong outperformance from a medium to long term perspective.

WF: What in your opinion is the key investment argument for an investor to consider this fund today?

Venugopal: I think a value style fund can find a place in an investors' portfolio at all points of time irrespective of the market environment. Given the recent rally in the market and overall market valuation level, it makes all the more sense to consider allocation to a value strategy as the fund strives to invest in stocks that offer adequate margin of safety. Also, the fund's flexible investment strategy allows it to explore opportunities across the market spectrum without any constraints which bodes well for investors.

Investment Style Details

Scheme Classification

An open ended equity growth scheme.

Investment Objective

To generate long-term capital appreciation from a diversified portfolio of predominantly equity and equity related securities, in the Indian markets with higher focus on undervalued securities. The Scheme could also additionally invest in Foreign Securities in international markets.

This product is suitable for investors who are seeking*

1. Long term capital appreciation

2. Investment predominantly in equity and equity-related securities in Indian markets and foreign securities, with higher focus on undervalued securities

Disclaimer: This document is for general information only and does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this information. This document provides general information on performance; financial planning and/or comparisons made are only for illustration purposes. The data/information used/disclosed in this document is only for information purposes and not guaranteeing / indicating any returns. This material provides general information and comparisons made (if any) are only for illustration purposes. Investments in mutual funds and secondary markets inherently involve risks and recipient should consult their legal, tax and financial advisors before investing. Recipient of this document should understand that statements made herein regarding future prospects may not be realized. Recipient should also understand that any reference to the indices/ sectors/ securities/ schemes etc. in the document is only for illustration purpose and should not be considered as recommendation(s) from the author or L&T Investment Management Limited, the asset management company of L&T Mutual Fund or any of its associates. Recipient of this information should understand that statements made herein regarding future prospects may not be realized or achieved. Neither this document nor the units of L&T Mutual Fund have been registered in any jurisdiction except India. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Compliance no. CL04424

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