Fund Focus: L&T India Value Fund

Truly a valuable addition in your clients' equity portfolios

Venugopal Manghat, Co-head Equities, L&T MF

In a nutshell

L&T India Value Fund's performance has been on a roll in recent years - strong YoY alpha, last two calendar years of top decile performance and continued strong performance YTD CY16 as well: this fund has surely been a valuable addition to investors' equity portfolios.

Venugopal believes that the flexibility to be market cap agnostic has been a key driver of performance and has used this leeway very effectively to generate alpha - first by ramping up midcaps when they were attractively valued and more recently by steadily increasing large cap exposure as they became relatively more attractive. Despite stretched market valuations, he continues to find individual stock picks in the BFSI, metals and consumption spaces which he thinks offer good value.

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: How do you define value for the purpose of this fund?

Venugopal: Our Value Fund is a diversified equity fund with a focus on identifying valuation anomalies versus the economic potential of the business over a period of time. I believe it is important to distinguish price from value. Value is what you get from the business or stock over a period of time. Higher the difference between the assessed value of a stock and its current valuation, the higher the margin of safety. While assessing the value of a stock, one has to assess its growth potential, cash flows, dividend payouts, subsidiary valuations, sum of the parts etc. Hence the focus of the fund is on buying good quality companies available at a discount to fair valuation and avoiding value traps. We look at valuation of a stock vis-à-vis its (a) earnings growth prospects, (b) historical long period valuation, and (c) relative valuation compared to peers. The valuation model / metric used also vary across businesses.

WF: Your fund's performance over the years has been remarkably consistent in terms of alpha generation as well as performance vs peers. To what do you attribute this consistent outperformance?

Venugopal: I believe the consistency in performance of the fund is largely on account of our superior 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: Isn't it now getting increasingly challenging to discover value in a market that is trading above its historical average valuations?

Venugopal: The current market valuations are certainly not cheap but I believe if you are a stock picker with a long term investment horizon, value investment opportunities still exist, especially if you do not have any market cap restrictions. Besides, I believe as the economic recovery gains momentum, many businesses could see strong earnings growth over the next few years, which to a large extent justify the prevailing valuation of some of the businesses.

WF: Which segments/sectors do you see value in today?

Venugopal: I believe for spotting value one needs to be much more stock specific in the current environment instead of looking at broader market segments or sectors. I think there are select stocks in the banking and finance space which are relatively attractively valued. As highlighted earlier, one needs to look at valuations in conjunction with earnings prospects of the businesses and I think some of the businesses in consumption and metals space do offer good investment opportunities.

WF: What are some of the key portfolio changes you have made in this year, in response to evolving market conditions?

Venugopal: The key changes that I have carried out during the course of this year are in terms of reduced exposure to IT stocks and addition some of the names from NBFC and banking space. I have also added positions in some of the stocks in consumer goods and metals sectors. From a market cap perspective, the large cap exposure of the fund has been steadily increased over the past few quarters.

WF: Does your fund mandate give you guidelines on market cap wise allocations or is the fund market cap agnostic? What is the proportion of large and mid caps now and how has this proportion changed in this calendar year?

Venugopal: We are market cap agnostic in this fund and that helps us explore value investment opportunities across the large, mid and small cap segments of the market. The fund currently has approx 50-55% exposure to mid and small cap stocks. We did have relatively higher exposure to mid and small cap stocks in the previous two years when the valuations were extremely attractive in that segment.

WF: What is your overall call on markets over the next 12-18 months and what do you see as the key drivers over the medium term?

Venugopal: I think from a short term perspective, global factors such as US election results; interest rates in the US, developments in Europe, etc may have some influence on the domestic market. However from a medium term perspective, earnings recovery would be the key trigger for the market. I expect earnings to gradually recover over the next 2-3 quarters. The various reforms that have been undertaken over the past 2 years are likely to yield results over the next few years. The government's focus on infrastructure spending, boost in rural and urban consumption on account of good monsoons and 7th pay commission could also act as key drivers for the market over the next 12-18 months.

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