Value Funds Vs Multicap Funds

Comparative Analysis of Value vs Multicap Mutual Funds

Introduction

In this article, we are going to do a comparative analysis of Value Funds Vs Multicap Funds, based on the parameters such as market capitalization, sector allocation, returns (calendar returns, trailing returns, rolling returns) and risk ratios etc.

Value Category : Value category funds follows value investing strategy for stock picking and it may or may not follow multicap approach for stock selection. Basically, value stocks are the stocks which are traded at relatively low price as compared to peers and they have low PE.

Multicap Category : Multicap category funds can invest across market capitalizations as there is no specific mandate as such but minimum 65% investment has to be equity. Multicap category mostly have growth oriented stocks. It can have value stocks as well.

In order to select between value fund and multicap fund, we have given comparison of category average in terms of market capitalization, sector allocation, returns – calendar, trailing, rolling and risk measures – alpha, beta, standard deviation and PE.

Following is the list of multicap and value funds which we have considered for comparison.

Market Capitalization

Both the categories have almost same allocation in midcap and cash, difference is in allocation in large and small cap. Multicap category has higher allocation in large cap and lower in small cap as compared to value category. Value category’s high allocation in small cap is due to the approach it follows. Multicap category is more inclined towards large cap. Value category funds are more aggressive from that perspective. They have more mid and small cap allocation as compared to multicap.

Sector Allocation

It is interesting to know that both the categories are very bullish on financial sector. Multicap has significantly increased its allocation in financial sector from 24% to 34% in last 5 years. Value category has also significantly increased its financial sector allocation. There is slight or no change in allocation in construction and FMCG sector. Value category has increased its allocation in energy sector while multicap has decreased and both have decreased in technology sector. Overall, there is not much difference in sector allocation.

Returns

Types of mutual fund returns is as follows :

Calendar Returns

Calendar returns are nothing but the absolute returns calculated from 1^st Jan to 31^st Dec. It shows if the fund is able to contain losses better than the index. There is not much difference between calendar year returns of multicap and value category in most of the years. Till 2016, both the categories have beaten benchmark. In 2017, Multicap category was beaten by both value category as well as benchmark. In last 11 years, 2018 was the worst year for both categories. Overall, they have performed consistently and very similarly.

Trailing Returns

In last 1 year, multicap category has done much better than the value category because of more allocation in large cap. Value category could not perform well because of its aggressive investment across market capitalizations. Small and mid-cap space has not done well in last one year. In 3, 5 and 10 years, there is hardly any difference from the returns perspective. Both have outperformed the benchmark in long term.

Rolling Returns

Rolling returns of the fund show consistency of fund’s performance. Again, there is not much difference in rolling returns. Value category returns are slightly better than multicap.

Risk Ratios

From the value of standard deviation and beta, we can see that there is no difference in risk profile. Both the categories take similar risk . Beta of less than 1 indicated that both are less volatile than the market. Alpha of multicap category is more because of greater allocation in large cap stocks. Value category has lower PE as expected. PE of benchmark is between that of multicap and value.

Summary

Currently, very little difference between value and multicap category in terms of risk and returns. One reason could be that many of the value funds currently do not follow pure play value strategy.
Even some multicap funds can have or do have value strategy. So, when planning to buy a multicap fund, you should consider both multicap and value category.