Why are value mutual funds underperforming?

Value funds have been underperforming for a while now. Many mutual fund investors are asking their advisors, writing on mutual fund forums, and messaging us on our official Facebook page about the reasons for the sustained underperformance of value-oriented schemes. Nilesh Shetty, co-fund manger of the pioneer value fund, Quantum Long Term Equity Value Fund, responded to these queries in detail at the ET Wealth Investment Workshop held in Delhi on January 17.

Speaking about the prevailing conditions the market, Shetty said, “We are seeing no earnings growth, but the market is expensive. This is where value investing doesn't work. The stocks are highly priced and those companies which are undervalued are going through liquidity crisis. When expensive stocks become more expensive without actual growth on ground, there is no value.”

Quantum Long Term Equity Value Fund has underperformed its benchmark and category average in the last two years. Nilesh Shetty said that such phases are a part and parcel of value investing. “If you want to invest in value style funds, you have to have a lot of patience. It will not give you phenomenal returns all the time, but it will prevent your downside,” said Nilesh Shetty.


A participant at the workshop asked Nilesh Shetty about the long phases of underperformance in value funds and their impact on long-term returns. Shetty explained how downside protection plays an important part in conserving long-term returns using data. “One of the biggest lessons in mutual fund investments is not to lose money. Focus on managing the downside well. That's the base of value investment,” said Nilesh Shetty.

Table of underperformance and gains by different funds

Many participants wanted to know when the value funds will regain their lost charm. “When we see no opportunity or value in the market, we sit on cash. We have sat on cash in phases when the markets have gone up. When the risk aversion comes back and valuations become saner, the value investing will come back,” Nilesh Shetty said.

Shetty also answered questions regarding the markets being at an all time high while the broader market not performing. “It is not that there hasn’t been a correction in the large cap space, but the index doesn't show it because concentration is so high to select stocks that are leading the rally,” said Nilesh Shetty.

He asked investors to have a balanced 80-20 strategy and said that mutual fund investors shouldn’t have more than 20 per cent in a value fund. So, they don't lose heavily when value stocks underperform, he said.