When markets are soaring, value investing tends to perform well, says Chintan Haria of ICICI Prudential AMC

Value investing, a time-honoured tradition in which investors seek shares they believe are underpriced, has gained considerable attention, especially at a time when markets are soaring to unprecedented highs. The lofty levels at which markets are trading currently beg the question: is this an opportune moment to invest under the value-investing banner? Navneet Dubey of BT Money Today explores this with Chintan Haria, Principal of Investment Strategy at ICICI Prudential AMC. Haria explains that a passive value fund employs a straightforward approach, screening and ranking companies using metrics like price-to-earnings and price-to-book ratios. Edited excerpts:

BT: Both ETFs and Index funds have seen huge inflows in 2023. Which pockets saw the highest investor interest? And do you see this continuing?

CH: With the increase in demat accounts and market participants over the past few years, the interest in ETFs and index funds has significantly improved. While it is true that most often the interest is limited towards benchmark indices-based offerings, at ICICI Prudential AMC, in 2023, we saw increased traction for smart beta strategies. Also, sectoral offerings based on banks and IT saw investor interest. This has been the result of improving investor awareness among the masses and increasing comfort around including passive strategies as a part of one’s portfolio. We believe this trend will continue in the times ahead.

BT: What does the introduction of new funds in the category mean? Sectoral and thematic funds witnessed increased inflow with the launch of new products. Is that a sign that investors are betting big on these schemes?

CH: More asset management companies are now focusing on passives by launching a variety of offerings in the sectoral or thematic space. Savvy investors today are increasingly opting for passive sectoral/ thematic funds as a part of their tactical/satellite allocation. Investors are opting for these investment vehicles as it is the easiest, most transparent way of taking exposure to a curated index at a low cost.

BT: With markets at elevated levels, is it the time for investors to practice value investing? What are the new passive offerings you have in the value space, and what mechanism do they follow?

CH: In elevated market conditions, value investing as a style tends to do well. This is because the focus at all times is to invest in names which are still available at a reasonable valuation. Over a full market cycle, such a strategy tends to deliver better downside resilience and has the potential to outperform broader market indices. In the value space, we have two offerings - an index fund and an ETF - based on the Nifty50 Value 20 Index.

When it comes to the mechanism followed by the index, stocks are selected from the Nifty50 universe based on parameters like Return on Capital Employed, Price Earnings Ratio, Price to Book Value Ratio, Dividend Yield and final ranking is derived from selecting the value stocks. Each of these parameters is given particular weights, and finally, the top 20 companies, as per the ascending order of the final ranking, are selected to form the index.

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BT: Passive offerings are more prevalent in large-cap space, as opposed to mid- and small-cap space. With the expectations that the large-cap will bounce back, do you see significant inflows on the passive side?

CH: If the investor is looking to participate in the sector's growth without taking a call on the fund manager, then a passively managed offering is helpful. Over the past few years, investors have been increasingly embracing passive strategies such as index funds and ETFs when it comes to exposure to benchmark indices. Going forward, we believe this trend will gather steam. However, what investors must be mindful of is that there is no scope for alpha generation in passively managed strategies.

BT: What are the key factors one should look at before short listing a particular passive product other than the past performance of the fund?

CH: The key aspect one should consider when choosing a passive offering is tracking error. Tracking error indicates how closely the fund is replicating the underlying benchmark. The smaller the tracking error, the better the investment outcome. The next aspect to look out for is the expense ratio. The lower the expense ratio, the better it is for the investor. Investors can check the fund factsheets for this information.