What makes L&T India Value Fund the value fund of the Decade

L&T India Value Fund

The L&T India Value Fund celebrated its 10th anniversary on 8th Jan 2020. Further, the fund holds the #1 rank in the value-oriented mutual funds category with a return of 14.35% per annum. In this post, we look closer at how the L&T India Value Fund reached this summit

About The Fund

The L&T India Value Fund is the 2nd largest fund in the value category. The fund has assets under management of over 7,700 crores since it’s launch in January 2010

In a decade of operations, the L&T India Value Fund has done extremely well in most years. Only in 2 years, the fund delivered negative returns as shown in the table below.

L&T India Value Fund has have positive returns in most years barring two years
L&T India Value Fund has done extremely well in most years and has delivered negative returns in only 2 years in 2011 and 2018.

The years 2012, 2014 and 2017 were the go-go years when this fund delivered superlative returns with over 40% returns.

To put that into perspective, the fund delivered an astonishing 74% returns in 2014 while NIFTY delivered a paltry 31%.

Infact the L&T India Value Fund did well over the NIFTY from the period between 2012 to 2017 which forms the bulk of the performances of this fund.

The period between 2018 and 2019 have been a dampener for this fund. The fund delivered returns of -11.3% in 2018 and 4.6% in 2019. This comes to an absolute return of -7.30% over the two-year period.

During the same period, the NIFTY 50 has delivered a 15.8% return. 

Gap between the L&T India Value Fund and NIFTY 50 was highest in Jan 2018
The gap between the L&T India Value Fund and the NIFTY 50 was at its peak in Jan 2018 post which marked a very lean period for the fund

The chart above shows the gap between the L&T India Value Fund and the NIFTY 50 was at its peak in Jan 2018. Post January 2018, the fund had a very lean period with questions asked of it in many publications and forums.

By Sep 2019, the fund had erased all gains accumulated over the last 5 years. It was now converging with a regular NIFTY index fund in performance.

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What led to fund’s poor performance in 2018 and 2019?

To understand the sub-par performance of the L&T India Value Fund in the last two years, we have to review where the stock markets stood around 2018.

Macro Factors since 2014

  • Stock markets around the world were on unabated euphoria including the Indian benchmark indices (Sensex and NIFTY). The Sensex hit the 34,000 mark and the India rupee too had hit a 32-month high against the US dollar.
  • Overseas investors had invested over $7.5 billion in 2017
  • Domestic small investors were busy building castles in the air. They had pumped $20 billion in 2017 fueling more growth in the stock market.
  • There was a lull in the real estate market and gold investments
  • The bull run had started with the coming of the BJP government at the centre. What started with large caps had spread to mid cap and small cap stocks. In the two years running upto January 2018, the Sensex rose by 38% while the earnings per share (EPS) of Sensex companies had gone up by only 16%
  • Over the last 3 years, the major benchmark indices in India showed growth to the tune of –
    • Sensex grew by 22%
    • Mid Cap Index rose by 68%
    • Small Cap Index went up by a huge 130%
Small cap and Mid cap stocks performance lifted returns of L&T India Value Fund
The small cap and mid cap indices really lifted the fortunes of the L&T India Value Fund which had a good portion of assets in low capitalization companies

L&T India Value Fund portfolio type

L&T India Value Fund’s assets in January 2018 were held quite evenly in large, mid and small cap categories. Unfortunately for the fund, the mid cap and the small cap funds tanked quite heavily in 2018. This dented the performance of the fund.

The fund lost steam during 2018 & 2019 as mid and small cap stocks crashed
L&T India Value Fund lost quite a bit of steam during the 2018 & 2019 period as mid and small cap crashed and even bets in large caps didn’t go as expected

Again in 2019, the fund had a high amount of assets in the financial sector. This period was quite challenging to the sector with defaults, scams in banks etc.. This too did not help the fund realise the optimum performance for its investors.

Comparison of this Value-styled fund with Growth-styled funds

Most value funds including the L&T India Value Fund have been underperforming when compared to growth styled funds over the last two years. There is no denying this – when one looks at the performance numbers.

In the last one year, value funds have delivered 3.4% returns. On the other hand, multicap & large cap funds have both returned 12% returns.

Over a three year period, we see value funds delivering 9% annual returns. However, multicap funds have delivered 12% and large cap funds delivered 14% per annum.

However, when assessed over a 10 year period, we see that value funds have performed better than multicaps and large caps. The average value fund delivering 11.4% yearly returns which is higher than the 11.3% delivered by a multicap fund. Large cap funds delivered just 9.9% per annum during the decade.

This shows that the value fund’s performance cycle is much wider as fund managers purchase these high conviction stocks at better-than-reasonable prices.

Performance of L&T India Value Fund

Let’s see some number around this.

If you had invested ₹10,000 in the L&T India Value Fund during its launch in January 2010 – your money would have grown to ₹34,700 by now. This comes to an annual return of 13.7% –  which is over 2% higher than an average value oriented mutual fund.

The data shows the fund had a placid time between 2010 and 2013. During this time, it grew my money from ₹10,000 to ₹12,200.

But then, between 2014 and 2017, the performance of the fund exploded. And my ₹12,200 grew to about ₹38,200 – which was a 200% acceleration in four years.

But again from 2018, a little gravity took over. The L&T India Value Fund lost about 10% of my money to have a current value of ₹34,700.

Behind this ups & downs, there were two pieces of information which gave a lot more credence to this fund which were –

  1. If we had put the same ₹10,000 in the fund’s benchmark i.e. the S&P BSE 200, my money would have grown to only ₹24,100 in a 10 year time period. Thus, L&T India Value Fund delivered over ₹10,000 additional returns compared to its benchmark.
  2. The fund has had only two years of negative performance in the last 10 years of functioning. This shows strong risk management and loss minimization practices which is key to value investing.

This shows that value styled funds like L&T India Value fund have a lifecycle of their own. While a number of value funds underperform over short periods, they have delivered excellent returns to investors over longer periods.

L&T India Value Fund’s Style of Investing

Why value value?

Value comes in many forms. And fund managers practice multiple styles of value investing with the dual objective of risk minimization and profit maximization.

The fund management team at L&T Mutual Fund has not shied away from defining its own brand of value.

This is important to understand.

A number of investors often link value stocks to those with low price-to-earning multiples or low price-to-book ratios. This need not be the case.

Great value investors like Warren Buffett have shown that value can be derived from giant companies with intangible parameters. Some examples of value include –

  1. an undisputable & recognizable brand [Coke, Apple]
  2. being the lowest cost producer [GEICO, Costco] and
  3. creating habitual products [Gillette, Amazon]

How this fund add value?

My research shows that the L&T India Value Fund investing philosophy is clearly a bottom-up stock selection strategy.

A scrutiny of their portfolio reveals that the fund shows a bias towards investing in fundamentally strong companies that have offered exceptional return on equity over the years. This is different from placing big cyclical bets or allocating money to high risk-high return endeavours.

The fund has a keenness towards companies that have a strong management in place. The L&T India Value Fund is also true to value investing principles. They invest in businesses which are available with a pricing margin of safety.

L&T India Value fund shows no sector bias. It has been focused on investing in undervalued stocks with no market capitalization bias aswell.

A lot of flexibility is available with the fund management team to scan through the entire database of companies and come up with strong picks. Or as we like to say “finding needles in a haystack”

To verify this, I mapped out the market capitalization of L&T India Value Fund over the last ten years. I see that the allocations to large cap funds have varied between a low of 30% in 2014 to a current high of 62%. During this time, the fund has reduced its exposure to mid-cap stocks from 55% to a low of 27%.

This means the fund is not hassled with which market capitalization their assets are in. They are more keen on identifying value which can happen across market caps.

Summary

To Sum Up –

The past five years have seen the equity markets being powered by growth stocks i.e. businesses which exhibit a higher earnings growth trajectory. These growth companies are now at rich valuations and as more hot money chases these stocks – value stocks have been left behind atleast for the last two years.

We established that a value stock’s strength lies in providing superior downside protection. This itself allows the fund to deliver healthy returns as long as the investor remains patient.

The L&T India Value Fund has not been the most consistent of funds. They have however, certainly offered superior risk-adjusted returns over the long run.

This makes a solid case for being featured in my portfolio as it diversifies the portfolio. It further ensures support from a unique set of priced reasonably companies that can cushion the impact of a downturn.

Click here for more information on the L&T India Value Fund including the brochures and other material

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