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Value investing works, will continue to work in the coming decades as well, S Naren of ICICI Prudential Mutual Fund

ICICI Prudential Value Discovery Fund has completed 18 years. The iconic value fund in the country has staged a remarkable comeback in the last two years after facing trying times between 2017 and 2019, when every investing principle, including value investing, was severely tested in the market. Shivani Bazaz of ETMutualFunds reached out to S Naren, ED & CIO, ICICI Prudential AMC, to find out his thoughts. “ICICI Prudential Value Discovery Fund has an AUM of Rs 24,694 crore which accounts for nearly 30% of the total AUM in the value category,” says Naren. “This indicates significant investor trust of value investors in the scheme. With value investing being suited for long-term investing, SIP emerges as a good investment pathway.”Edited interview.
Value Discovery Fund has completed 18 years. It must have been a memorable journey. What are your thoughts?
The 18-year journey of the fund and its investor experience has proven that even in a growth market value investing has a role to a role to play and we are very happy about it.

India is perceived as a growth market and consequently, people believe that value investing does not have much of a role in a growth market like India. We are of the view that value investing does not depend on whether it is a growth market or otherwise.

ICICI Prudential Value Discovery Fund has an AUM of Rs 24,694 crore which accounts for nearly 30% of the total AUM in the value category. This indicates significant investor trust of value investors in the scheme. With value investing being suited for long-term investing, SIP emerges as a good investment pathway.

Value investing was not so huge 18 years ago – what prompted the launch of the scheme and what has been the experience over the years?
Globally, value investing has been huge all this while. Only because of the perception that in a growth market value investing will not work, there was a problem; otherwise it has always been huge. Our experience has shown that value investing works and will continue to work in the coming decades as well. In the meanwhile, investors have to be patient with their investments as value investing may not work well in all phases of the market. For those investors who are ready to stay invested with a long-term view, the experience can be very rewarding.

Value theme was severely tested in the last few years. Even the Value Discovery Fund went through a rough patch between 2017-19. How do you view the period now?
Value theme has been tested at various points in time. It was tested from May 2006 to January 2008, later it has been tested between 2017 to 2019. A similar trend will continue to play out whenever there is extreme bull market in any particular segment of the market. Example: Infrastructure in 2007, small and midcap in 2017. In the US, technology sector had a big rally and that lasted longer period. So, globally, in America value investing had a tougher period than in India.

Furthermore, valuation wise Indian equities is not cheap. Up until September 2020, value was out of favour but as markets became expensive value was back in focus and has since then delivered encouraging returns. Value investing typically tends to do well at a time when market is elevated, as value focuses on investing in sectors which are out of favour but offer long term potential.

The scheme made a spectacular comeback in the last two and half years. What was your strategy?
From a fund perspective, there has been no change in strategy. It is just that value investing based calls played out post the US Fed embarked on quantitative tightening and interest rates globally started to edge higher.

Old value investing won’t work in the new world- one hear it often in mutual fund circles. What’s your take on it?
If you look at the 18-year period of ICICI Prudential’s value investing based offering, we see that value investing does work over the long-term. However, it is true that value may not work in shorter periods of time.

The scheme is closely identified with you – S Naren, the contrarian and value investor – even though it was managed by another fund manager for a long period. How much your investment style influenced the scheme?
Value investing is something we believe as a house and irrespective of the fund manager, value investing will deliver returns in the long run for long term investors.

You always say investors should get into the scheme only if they understand value investing. Do you still maintain the stance? If you were to simplify it, who should invest in value funds and who should stay away?
We believe that it is not the person who understands value investing who has to get in; it is the person who is willing to stay invested for the long term that has to invest. This is because value investing works in the long run.

The scheme is investing more in energy, healthcare, communication vis-a-vis the category. What’s the thought process?
We have invested more in energy, healthcare and communication because the lessons learned from 2020 was pandemic showed the importance of health care, work from home showed the importance of communications and the recent Russia-Ukraine conflict showed the importance of energy. So, it is the events of the recent past and undervaluation and the importance of these sectors has resulted in our investing more in these sectors.

Are you satisfied with how the fund has done over the last almost two decades? Are there any big misses you regret?
In our opinion, the regret has been that people sometimes have associated value investing with buying junk. Such investors practised value investing by buying sectors which are fundamentally weak and may never recover as well. Somehow people associate value investing with buying cheap stocks, but it is actually buying stocks cheaper than their intrinsic value. Most investors missed this point when they invested in fundamentally weak NBFCs, real estate names which were trading below their intrinsic value.