Nifty 50 Value 20 (NV20) Index: Is this better than Nifty 50?

Nifty 50 Value 20 Index composition as on July 2019

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The Nifty 50 Value 20 index (NV20) comprises of 20 large cap value stocks from the Nifty 50. There are currently three ETFs that track this index. So the natural question to ask is, is Nifty 50 Value 20 Index better than the Nifty 50? Let us find out! The three ETFs tracking NV20 are Kotak NV 20 ETF (since Dec 2015, 12 Crores), ICICI NV 20 ETF (June 2016, 6 Crores), Reliance NV 20 ETF (Jun 2015, 30 Crores).

How is the Nifty 50 Value 20 Index created? 

Stocks with low PE (30% weight), low PB (20% weight), high div yield (10% weight) and high ROCE (40% weight) are shortlisted from the Nifty 50. The stocks with the top 20 “value rank” are chosen to be part of the index.

 The portfolio is reviewed annually but with quarterly compliance checks. If a stock from the top 20 is still part of the top 30 upon review, it will be retained in the portfolio to minimise churn. If there is a new entry within the top 5, then the bottom stock in the existing portfolio will be replaced with it. Read full methodology

Does this index replicate or represent value investing?

Not quite in my opinion. Suppose you are a value investor and spot a couple of “value buys”. That is, the stocks are trading below their intrinsic value. You go ahead and buy them. After a year , you see a new stock that is also a value buy. Your existing stocks are no longer value buys but have given you good profit. Will you replace them with the new value stock just because you are a value investor? Or will you hold on them until there is something wrong?

We buy value stocks to participate in the growth when the market wakes up to it. We do not buy value stocks just for the sake of it.  That is what this index does. So I do not think this index replicates realistic value investing.

Opinions aside, does this strategy work? Let us find out.

Nifty 50 Value 20 TRI vs Nifty 50 TRI

Let us now compare, PE, PB, Div yield and total returns index (TRI) values of NV 20 and the Nifty.

Total Returns Index Comparison

Nifty 50 Value 20 TRI vs Nifty 50 TRISince incpetion the NV50 has comfortably beat the Nifty. However, please note that this is just one return data point  (incpetion to last traded value). We need to dig a lot deeper.

PE Comparison

You can clearly see the lower PE of NV 20 below. The sudden drop in PE at the start of 2019 is probably due to a portfolio review. A touch too jerky if you ask me.

Nifty 50 Value 20 PE vs Nifty 50 PE

PB Comparison

Similarly, the lower PB of the value index is also seen.

Nifty 50 Value 20 PB vs Nifty 50 PB Ratios

Div Yield Comparison

The higher dividend yield is also apparent. Dividends play a big role in NV20. According to the July 2019 factsheet, there is a 2% plus difference between the NV20 price index and TRI index.

Nifty 50 Value 20 Div Yield vs Nifty 50 Div YieldRolling Returns Three Years

Over every possible 3 year period, the NV20 has not outperformed Nifty 50 often enough to be noticeable.

Nifty 50 Value 20 vs Nifty 50 Rolling Returns 3 yearsRolling Risk three years

The associated volatility in monthly returns over three years is a touch higher than the Nifty 50. From the fact sheet, the relative volatility (beta) of NV20 is 98% over five years. This does not justify the additional effort associated with NV20 selection compared to the Nifty.

Nifty 50 Value 20 vs Nifty 50 Rolling Risk 3 yearsRolling returns five years

Nifty 50 Value 20 vs Nifty 50 Rolling Returns 5 yearsThere is not much of a five-year return history.

Summary

I think the Nifty 50 Value 20 index does not based on current data, make much sense as a standalone investment. It can, however, be used in a couple of ways. Suppose you are in late 40s, early 50s, the building a portfolio of solid dividend stocks makes sense. Then you can combine this index with say the Nifty Dividend Opportunities 50 to pick some stocks. Or you can combine the value index with the Momentum, Low Volatility Stock Screener and pick value stocks with “quality momentum”. Watch my talk on momentum and low volatility stock investing in India for more details.

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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