{"id":17796,"date":"2020-02-19T14:50:58","date_gmt":"2020-02-19T09:20:58","guid":{"rendered":"https:\/\/www.fundsindia.com\/blog\/?p=17796"},"modified":"2020-02-21T18:20:28","modified_gmt":"2020-02-21T12:50:28","slug":"idfc-sterling-value-fund","status":"publish","type":"post","link":"https:\/\/www.fundsindia.com\/blog\/mf-research\/idfc-sterling-value-fund\/17796","title":{"rendered":"An underrated fund at the helm of a veteran fund manager"},"content":{"rendered":"
Not so great recent performance…<\/b><\/span><\/h5>\n

Intuitively most of us like to buy a fund with a strong recent performance or high star rating (which is significantly influenced by strong recent performance).<\/span><\/p>\n

Let us check what IDFC Sterling Value Fund\u2019s<\/span> recent performance looks like…<\/span><\/span><\/p>\n

\"IDFC<\/a><\/span><\/p>\n

Oops! Nothing to write home about.\u00a0<\/span><\/p>\n

So our natural response is to conclude: \u2018Weak performance means not-so-good fund. Hence let me ignore this fund\u2019<\/span><\/p>\n

But what if we told you that, this is an interesting offering that you must consider!<\/span><\/p>\n

This is exactly where we want you to take a pause and evaluate this fund with an open mind.<\/span><\/p>\n

The lure of past performance…<\/b><\/span><\/h4>\n

While the ultimate endeavour is to outperform benchmark market indices over the long term, there are different approaches fund managers\/funds adopt to achieve this.<\/span><\/p>\n

Some funds are large-cap oriented, some are mid-cap focussed, some are small cap oriented, and some are a combination of the above and so on. Some follow the growth strategy, some are momentum-driven, while some are value-oriented and some are a mix of these.\u00a0<\/span><\/p>\n

As investors, you must realize that different approaches to generating long-term returns also imply different trajectories of returns. Each approach will lead funds to periods where they do well and occasional periods where they underperform.<\/span><\/p>\n

Any approach to long-term outperformance is guaranteed to have occasional short-term underperformance.\u00a0<\/b><\/span><\/p>\n

If you only go for funds with strong recent performance, there is a high likelihood of ending up with a portfolio of funds having a similar investment approach. This means all the funds in your portfolio will rise and fall together at the same time, thereby not providing any diversification benefit.\u00a0<\/span><\/p>\n

This approach becomes particularly dangerous during bubble phases as the highest returns are earned only by products that take high levels of risk \u2013 either in terms of sectoral concentration or high valuations or dilution in balance sheet quality.<\/span><\/p>\n

Diversified portfolio construction approach to the rescue…<\/b><\/span><\/h4>\n

In our view, an equity portfolio should be constructed using a few good funds that follow different investment approaches.<\/b><\/span><\/p>\n

This reduces the overall volatility of the portfolio without compromising on long-term outperformance.<\/span><\/p>\n

As long as the respective fund managers are sticking to their stated mandates, investment approach and are managing risk in a logical manner, this approach should help us achieve a successful investment outcome in the long run.<\/span><\/p>\n

So this leads us to the next logical question:<\/span><\/p>\n

Which investment approach has a proven long-term outperformance record but is currently out of favour (read as going through the occasional but expected underperformance)?<\/b><\/span><\/p>\n

Over the last few years, these are the investment approaches that have been going through tough times<\/span><\/p>\n

    \n
  1. Midcaps<\/span><\/li>\n
  2. Smallcaps<\/span><\/li>\n
  3. Value<\/span><\/li>\n<\/ol>\n

    What would be your return expectations for the last few years from a fund exposed to all the above three strategies?<\/b><\/span><\/p>\n

    This is where things get interesting.\u00a0<\/span><\/p>\n

    IDFC Sterling Value Fund is exposed to all three!\u00a0<\/b><\/span><\/p>\n

    No wonder the fund has underperformed in recent times.<\/span><\/p>\n

    We also know from history that these three investment styles mid, small and value have delivered outperformance over long periods not just in Indian markets but also in global markets.\u00a0<\/span><\/p>\n

    While it is difficult to exactly time when there will be a reversal of performance towards these three styles, from a 3-5 year forward-looking perspective, going by history the odds are tilted in our favour.<\/span><\/p>\n

    If you buy this logic, then you should definitely consider some exposure to these three currently underperforming styles in your equity portfolio allocation.\u00a0<\/span><\/p>\n

    This is where we find IDFC Sterling Value Fund as an interesting opportunity.\u00a0<\/span><\/p>\n

    IDFC Sterling Value Fund – An underrated fund at the helm of a reputed fund manager…<\/b><\/span><\/h4>\n
      \n
    1. \n

      Backed by a veteran fund manager with a 17-year proven record in mid and small cap space<\/b><\/span><\/h4>\n<\/li>\n<\/ol>\n