Fidelity India

Views on Value Investing as a Concept - Part 1

Nitin Bajaj
Nitin Bajaj is the Fund Manager of the Fidelity India Special Situations Fund and the Fidelity India Value Fund.

Nitin joined Fidelity International in 2003 as a research analyst in London. After a very successful and highly rated period in research, in 2007, he became an Assistant Portfolio Manager for the Global Special Situations Fund in the UK with a remit to search for investment opportunities globally. As a research analyst, he covered European food and tobacco and large cap Italian and Spanish banks.

Prior to joining Fidelity, he was at KPMG in India for four years working as a business analyst.

Nitin holds a Bachelor of Commerce degree from the University of Delhi and an MBA from Insead, Singapore. He is a member of the Institute of Chartered Accountants of India.
By Nitin Bajaj, Portfolio Manager Fidelity Worldwide Investment

Value investing and growth economy are not contradictory. Value investing is trying to buy a business for less than what it is worth. Growth is just an input in trying to understand the value of the underlying business. Value investing works as much in low growth Japan as it does in high growth China. Infact, US went through a huge growth phase between 1980s to 2000. Warren Buffet, the most renowned of all investors made his fortune during this phase.

It is a common mistake to say that GDP growth and value investing are contradictory. Actually I have seen studies by Imperial Research which show exactly the opposite value investing works better in emerging economies than in developed economies. I guess it is for 2 reasons. First, emerging economies will generally have more market inefficiencies to exploit - hence chances of finding under valued stocks are higher. Second and more importantly, GDP growth is great for value stocks as it provides the tail wind required for re-rating of these businesses.

Even in India, over the last 5 & 10 years MSCI Value has out performed MSCI Growth by a huge margin (118% Vs 51% over 5 years; 510% Vs 265% over 10 years). With in this, there will be cycles and so for example last 12 months, MSCI Growth has done better than MSCI Value (9% Vs 6%).

It is important in Value Investing to understand the business - why it exists, who are the customers, why they buy the product, what is the competitive advantage of the business and how sustainable it is. Then try to arrive at what you think it is worth and finally compare it with the price that market wants you to pay for it. It is the same process - be it UK, Japan, Brazil or India.

I started managing India Special Situations Fund from 1 August 2009 and yes it was a good time to play value as we were coming out of an inflection point, valuations were attractive and earnings plentiful - a good time for so called value stocks. Hence the fund has been able to return ~34% since then Vs 18.5% for the Nifty.

But if you look over the last 12 months, the market has become pretty narrow and the common theme for what has been working has been defensive high quality growth irrespective of the valuation. These stocks have seen good earnings growth plus a huge re-rating from a level where they were not cheap to start with.

I feel today there is immense amount of fear in investors and a lot of the people are out of equities. A lot of the institutional investors are chasing similar stocks - so market does not have much breadth. This is great news for stock pickers with patience. People are scared to invest in banks, infrastructure related companies, capital goods, cement, etc etc. I find a lot of these stocks to be very attractively priced. People are basically paying low P/E on low margins for these businesses. Are things tough, yes they are. Can India grow even at 7% with out a capex cycle, no it can't. Do I think India on average can grow at 7% for next 3 - 5 years, yes I do. So it is natural for me to seek these opportunities. So far, I have been a bit early, but it is impossible to time the bottom. All I can say is that based on my work, I do feel there is significant margin of safety in these stocks and very little margin of safety in the current darlings of the market. I am selectively buying as I am finding more opportunities in areas which are currently being ignored, i.e. mid caps, selective banks, real estate, construction, etc.


The views expressed in this section are indicative. Your investment decisions will depend on your own circumstances, risk appetite and time horizon. You may want to consult your Financial Adviser for guidance.
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