On Nov 20, 2020, DSP Mutual Fund is launching a new fund – DSP Value Fund. The fund aims to follow value investing principles and invest in domestic as well as international stocks. It also plans to take on valuation based calls and sit on cash/money market investments, if right opportunities are not available.
As I read though the fund details, my mind keeps asking – isn’t there another fund doing the same thing?
Anyways, we will come to it later.
So, what does DSP Value Fund have to offer?
The primary investment objective of the fund as stated in the Scheme Information Document (SID) is:
…to seek to generate consistent returns by investing in equity and equity related or fixed income securities which are currently undervalued.
As part of the investment strategy note, it mentions:
…aims to provide long term capital growth by investing primarily in a well-diversified portfolio of companies that are selected based on the criteria of Value Investing. Value investing is an investment strategy where stocks are selected that trade for less than their intrinsic values.
As per DSP’s Framework for Value Investing, this is what the fund intends to do:
- Finding quality companies at a sensible price (as also eliminate mediocre companies)
- Holding cash when no suitable investments available
- Looking for Value in India and Overseas
- Managing risks through diversification and position sizing
- Combining strengths of fundamental and quantitative investment approaches
With its Portfolio Construction, the fund aims to have an equity taxation structure even as it goes for diversification with overseas equities and an opportunistic allocation based on valuations.
The asset allocation of the fund is:
- Domestic equities (65-100%)
- Overseas / Global equities (0 – 35%)
- Debt and money market (0- 35%)
When valuations are excessive in the Domestic Equities – 65% part, the fund can hedge (aka protect downside) with cash futures arbitrage.
Overall, the fund is likely to follow a multicap approach in stock selection, going across the market to find its investment opportunities.
No doubt, given the name, the fund is also going to be categorised under “Value” category as defined by SEBI.
Instead, it is better compared with funds such as:
Their mandates too have a mix of Domestic + International Exposures.
What’s different about the DSP Value Fund?
The mixture suggests rules, valuation based calls and downside protection. Now, all offered under one umbrella of DSP Value Fund.
One of the key differentiators and stated explicitly in the fund notes is that they are going to use quantitative investment approaches as well (much recently being exercised in the DSP Quant Fund).
There is no clarity on the expense ratio of the fund and if that remains low, it could be an advantage for it.
It is also not clear if the international stock investments will be done via other funds or directly.
The fund has an interesting benchmark – Nifty 500 Value 50 TRI. 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 Earnings to Price ratio (E/P), Book Value to Price ratio (B/P), Sales to Price ratio (S/P) and Dividend Yield. (Source)
In fact, it is time to create a relevant benchmark for mandates that have domestic + international equities.
What’s the verdict then?
If you carefully go through the fund proposition again, notice the use of the word ‘consistently’. This indicates that it is not in a hurry to beat any benchmark or generate super normal returns but to focus on a more consistent investor experience.
For several conservative investors, this is a relevant offer. Given the fund house’s track record, they have the ability to execute it well.
But we are not in a hurry, are we?
Not to mention the fact that there is already an existing fund with a similar strategy and a great track record that is a part of your portfolio, hopefully.
Let’s watch the DSP Value Fund over the next couple of years and then evaluate if it makes for a valuable addition to the portfolio.
Interestingly, the fund clearly states that if you are not thinking decades with your investments, this may not be the right fund for you. That, in any case, rules out 99.9% of the investing population. 🙂