The fierce battle between index funds and exchange-traded funds versus actively managed peer-to-peer funds continues, with many in the latter club, despite the stellar returns required. generate alpha. Take this as an example: Value funds have posted a pretty high CAGR of 27.4% over 3 years, but every second plan has performed well below their respective benchmarks. So many actively managed value funds need help matching their standards. Against this backdrop, UTI Mutual Funds has entered the passively managed value fund sector, with the launch of the UTI Nifty 500 Value 50 Index Fund (NFO closed May 8, 2023). Active or passive capital? Which style generates better funds in the value portfolio? Let’s take a look at what options are currently available to funding investors and how they have performed.
Investment value is a strategy that involves selecting securities that appear to be trading for less than their intrinsic value. Fund managers buy undervalued stocks in the belief that they will eventually appreciate when the market realizes their true value. The advantages of value investing are the potential for high returns, low volatility, and portfolio diversification. The value investing approach, on the other hand, requires a lot of patience, the ability to buy value traps, limited upside potential compared to growth stocks, and in-depth research. Here’s how, as a portfolio, actively managed value funds have performed against their benchmarks
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At this point, 5 ETFs have a value investing approach. they are Motilal S&P BSE Enhanced Value ETF, HDFC Nifty50 Value 20 ETF, Kotak Nifty50 Value 20 ETF, IPru Nifty50 Value 20 ETF and Nippon India Nifty50 Value 20 ETF. From a total expense ratio perspective, they cost 0.14-0.5% compared to 1.3-2.5% for actively managed value funds.
Let’s take a look at the fundamentals before getting into the ETF. As you can see, these ETFs track two indices – the S&P BSE Advanced Value Index and the Nifty50 20 Value Index.
The S&P BSE Advanced Value Index is designed to measure the performance of 30 companies in the S&P BSE LargeMidCap with top valuations based on three fundamental metrics – book value to price, earnings per price and sales per price. So the stock universe is large and medium. The basket’s current top holdings are concentrated in metals/mining, energy and PSU banks such as Hindalco, Tata Steel, ONGC, Vedanta, NTPC, Coal India, Bank of Baroda, IOCL, Gail India and Canara Bank.
By comparison, the Nifty50 Value 20 Index is designed to reflect the behavior and performance of the diversified portfolio of value companies that form part of the Nifty 50 Index. So the stock universe. basically giant hats. The current top stocks of this basket are much more diversified in terms of exposure by industry (FMCG, IT, Mining and Electricity). The list includes ITC, TCS, Infosys, HUL, HCL Technologies, Tata Steel, NTPC, Power Grid, JSW Steel and Tech Mahindra.
The Motilal S&P BSE Enhanced Value ETF is less than a year old, so no longer has an active history. In six months, the ETF has gained 16%, outperforming the BSE 100, which was unchanged. This is also a period when value stocks generally outperform. Similarly, the HDFC Nifty50 Value 20 ETF is also less than a year old. In six months, it posted a return of 3.4%, better than the broader markets. The remaining 3 ETFs, i.e. Kotak Nifty50 Value 20 ETF, IPru Nifty50 Value 20 ETF and Nippon India Nifty50 Value 20 ETF, have 6-7 years NAV history, allowing them to analyze long-term returns. The 1-year and 3-year tracking errors of all three ETFs are similar (1 year: 0.03 and 3 years: 0.05-0.06). To check returns against the value fund portfolio as well as the Nifty 500 Value 50 index against which the UTI NFO has come out, see the table below.
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Index Fund Options
Including the newly launched UTI Nifty 500 Value 50 Index Fund, there are three index funds in the value fund sector. The other two products are the Nifty50 India 20 Nifty50 Value Index Fund and the Motilal S&P BSE Advanced Value Index Fund. Index funds allow investors to make SIP investments and you don’t need a required demat account to operate it (unlike ETFs). However, index funds are slightly more expensive than ETFs, i.e. 0.8-1.01 percent (TER).
UTI Nifty 500 Index Fund Value 50 will track the Nifty 500 Value 50 Index Fund, which is unique in certain ways. The Nifty 500 Value 50 Index consists of 50 companies from its parent NIFTY 500 index, selected based on their ‘value’ scores. The value score for each company is determined based on its Earnings to Price (E/P), Book Value to Price (B/P), Sales to Price (S/P) and Dividend Rate. The Nifty 500 is a multi-cap index that, at least in theory, opens up the index basket to large, mid-cap, and small-cap stocks compared to the existing value-oriented passive fund options, both ETFs and index funds, which favor large-cap stocks. However, the current top 10 stocks of this index are Power Grid, NTPC, BPCL, ONGC, PFC, Tata Steel, Grasim, IOCL, Vedanta and Hindalco. When you break through the top 10, you can see names like Exide, Petronet, LIC Housing, CESC, NCC and Great Eastern Shipping.
In terms of index tracking returns, the two existing value-oriented index fund options show different trends. The Motilal S&P BSE Advanced Value Index Fund has a much higher tracking error (1 year monthly: 0.79), while the Nifty50 India 20 Nifty50 Value Index Fund (1 year: 0.03 and 3 years: 0.12) is more reasonable. In terms of performance, both index funds have short track records, so the returned data may not be used to conclude anything significant. The 1-year return of Nifty50 India’s Nifty50 Value 20 Index Fund is around 2%, falling behind the value fund portfolio and broader markets. The Motilal S&P BSE Advanced Value Index Fund doesn’t even have a one-year NAV history, but in six months it’s done almost 15% in return, better than the portfolio and the overall market.
While the Nifty 500 Value 50 index itself appears to have outperformed other value indexes, the BSE 100 and the value fund portfolio average over the 1- and 3-year periods, lagged behind them for a longer period of time than 5 years. One needs to wait and see the performance of the new UTI Nifty 500 Value 50 Index Fund.