Fidelity India Value Fund - Where's the Value?

In Jaunary 2010, Fidelity India launched its value fund targeting long term oriented investors. The launch of the fund was accompanied by a big campaign in which Fidelity tried to build up interest in Value Investing among Indian investors, by advertising it as being similar to bargain shopping, a talent Indians excel at.

The fund has now been in operation for about 4-5 months now. Ever since the launch of the fund, I have been eager to find out what kind of stocks the talented guys at Fidelity would buy. So, I decided to have a look at the portfolio using Morningstar India's excellent Mutual Fund screening service.

The Fidelity India Value Fund portfolio
The portfolio snapshot is available here.

Having a look at the portfolio, I felt that there is a big gap between Fidelity's grandiose proclamations of investing in value stocks, and the ground reality of what their portfolio actually looks like.

P/E Ratio of the portfolio
As is well known, the P/E ratio is considered to be a reasonably efficient way to identify whether a stock is a value investment or not. Purists (i.e. of the Benjamin Graham) would probably say that a P/E < style="font-weight: bold;">

The portfolio Price/ Prospective Earnings ratio of the Fidelity India Value fund is > 10. Given that the projected earnings growth of the portfolio is calculated at 16%, it is safe to assume that based on past earnings, the portfolio P/E > 12.

The portfolio's P/B is > 2x. The biggest component of the portfolio is Reliance Industries, which is trading at a TTM P/E of 19, and is also trading very close to its 52 week high. Another major holding is ICICI Bank, which is currently trading at a TTM P/E of 20. Infosys - another holding - trades at TTM P/E > 25.

As a value investor, the most important attribute is the ability to stay away from the crowd and invest in companies which are not being favoured by the rest of the markets. It is very difficult to understand how Fidelity believes that companies trading at P/E > 20 are stocks which are being ignored by the market, and hence worthy of being part of a Value Focused Fund. (It is to be noted that these P/Es are not high because of a low base effect, i.e. low earnings last year due to the global recession. These are Trailing Twelve Month P/Es, i.e. based on earnings in the 4 quarters leading upto March '10, when corporate India has recorded bumper profits, which means that the high earnings are already factored into the stock price).

This double-speak is wide-spread
This fund seems to be following a pattern that is seen across fund houses. Frequently, MFs start new funds, claiming to follow different themes like Infra, PSU, Contra, etc. However, at the end of the day, the portfolios of these funds are remarkably similar. I was surprised to see, for instance, that Reliance Infrastructure Fund, which raised several hundred crores claiming to invest in India's infrastructure opportunity, was investing in bank stocks. The rationale: since banks are lending to infrastructure companies, they are also part of the infra story, and hence are well suited for an infra fund.

The only word of advice this humble investor would like to give is that one must be very cautious of fund houses and their gimmicks. It is better to invest in index funds than to fall for such tricks.