Whither value?

This is the fifth edition of Outlook Business’ India’s Best Fund Managers. And the best names in the game seem to be holding their position fairly well. Barring a few changes in the ranking, fund managers with a track record of long-term performance (10-year) remain nearly constant. The change in short-term performance (1-year) for 2019, however, has several new names. 

This is not unusual. The outperformance last year was driven by a small group of stocks that were able to deliver growth. So, managers who loaded up on those stocks did very well. Even if you look across portfolios, the dominant theme has been a decisive shift towards large-caps, and ‘quality’ stocks. Be it consumer discretionary or financials, ‘value’ seems to be taking a backseat, and ‘paying up for quality’ seems to be the mantra. 

While paying up for quality as a philosophy is not a problem per se, the valuations today hardly leave any room for outperformance considering the best case scenario, which is the economy growing at 6-7%. At least that is what straightforward math will tell us. 

But the current liquidity scenario leads us to think otherwise. The large sums of money that is already flowing into domestic mutual funds through systematic investment plans, the sustained lowering of interest rates that is leaving savers clamouring for options to better the return on their savings pool, and the compulsion for pension and provident funds to earn a better return to sustain their expected/assured rates will only mean greater allocation to equities on a sustained basis for the foreseeable future. All of these first-time equity allocations are unlikely to go into ‘riskier’ mid- and small-caps; they’ll continue to be deployed in large-caps, sustaining their elevated valuation. 

Besides, the short-term trend doesn’t seem to suggest a different path. The Budget has not addressed immediate growth concerns. The one-time boost from the corporate tax cut left investors asking for more, but that has not come to pass. If there is still buoyancy in the benchmark, it’s probably a reflection that investors expect the RBI to propel asset prices higher by pushing down real interest rates.

Thus, in the ensuing quarters, too, as growth concerns mount, the flight to safety will only continue. The market most likely will remain polarised, and fund managers will herd. But, it is the ability to take contrarian bets at this time that will create a marked difference in performance over the long term.