The inherent margin of safety approach is what makes value investing relatively less subject to downside risks
By Sorbh Gupta
Value investing has long been advocated by industry stalwarts such as Warren Buffet and Benjamin Graham. Although it has been overshadowed by growth investing in recent years, value investing has now come back to prominence. And investors are asking if value investing is here to stay.
After a decade of underperformance, value funds have emerged and trumped growth funds in FY21. During 2000 -2009, the MSCI value index performed better than the growth index. However, during 2010 -2019 growth superseded value. The last 10 years (2010-2019) have been characterised by low global GDP growth, low inflation and remarkably low interest rates. This resulted in liquidity chasing a few companies making the market polarised. In contrast, 2000-2009 was characterised by a high growth global GDP growth rate and better G-sec yields and that is when value investing thrived.
Metrics for value funds
Value fund managers analyse the stock price of a firm based on fundamentals relative to its sector, its historical performance, and overall market trends. During the Covid-19- induced market collapse of early 2020, value fund managers got an opportunity to acquire high-quality stocks at attractive valuations, generating risk-adjusted returns when markets recovered.
In the short term, the equity market might not reflect the real fundamentals but may merely move on sentiments and liquidity. Apart from the above listed variables, corporate earnings in the June-21 quarter and management commentary on demand and raw material inflation will also set the tone for future earnings growth trajectory. Value investing is for the long-term. The inherent margin of safety approach is what makes your investment relatively less subject to downside risks.
The writer is fund manager, Equity, Quantum Asset Management