The recent market volatility has produced a buying opportunity in value and recovery stocks, according to Nick Peters and Gervais Williams, which are areas of the market which were hit hardest during 2015’s falls.
Peters, who co-runs the Fidelity Multi-Asset fund range, managed to generate positive returns last year despite the FTSE 100's poor performance, and he attributes this to making tactical asset allocation and strategy selection calls that aren't necessarily popular with the investing majority.
Performance of manager vs peer group and index in 2015
Source: FE Analytics
During 2015, growth stocks in the FTSE World index significantly outperformed value stocks, partially as a result of increased cautiousness following China’s slowdown and the oil price collapse.
Performance of indices in 2015
Source: FE Analytics
In an article published near the end of last year, Investec's head of value investing Alastair Mundy (pictured) said that we are in the throes of a "value hell" due to stretched valuations and the vast number of macroeconomic and geopolitical headwinds on the horizon. 
“I don’t think I’m saying anything particularly weird when I discuss my bear argument, but then I look at other people’s portfolios and they look nothing like mine. I think in general, everyone’s got their fingers crossed hoping that everything is going to be okay,” he told FE Trustnet in December
“Our industry always wants to be bullish, we always want to tell our clients that we’re either optimistically optimistic or cautiously optimistic, so we have got a bias. I just don’t see a huge amount to be optimistic about at the moment.”
However, an increasing number of highly active managers are beginning to turn to the value and recovery space once again in a bid to find hidden gems that have been mispriced by the market.
“Generally, growth stocks have performed very well in recent years and value has underperformed," Peters (pictured) said.
"Our [fund] range aims to add alpha from both tactical allocation and manager selection and that has worked successfully, but we have been taking profits from the growth managers and have added to those with more of a contrarian and value style because we do feel at some point we’ll see a bounce back in value investing."
Peters is also seeing opportunities in other areas of the market that many investors are cautious on from a value perspective, and has recently reduced his underweight in emerging markets. He adds, though, that he is not yet positive enough on the sector to hold an overweight or neutral position.
"[If you look at] emerging market performance against global equities, you can see there’s a strong correlation between that and consensus GDP. There is a general perception that Chinese growth is likely to weaken from current levels," he explained.
"There will be a time to buy emerging markets because they look cheap, but the issue we have at the moment is that returns are falling. The region is trading on a P/B of over 1x, it reached 1x during the financial crisis and even dipped below this during the Asian crisis in the late 1990s - so yes they’re cheap, but they could be cheaper and we’re monitoring that very closely."
Peters isn't the only manager turning his attention to the value and recovery space.
Gervais Williams, who co-runs a number of funds and trusts at Miton, says that he is finally seeing recovery coming through in a number of his holdings. One of these is Fulcrum Utility Services, which is the second-largest holding in the Miton UK MicroCap Trust and has outperformed its FTSE AIM index by more than 117 times over the last year.
Performance of stock vs index over 1yr
Source: FE Analytics
"The investment team came into the office at October 2013. It’s driven by customer service, and as that’s come through they’ve gained a better margin, more efficiencies, they’ve grown some sales, and it’s lovely to see a good company with a good management team not just making money for our clients, but delivering fantastic services as a successful company," he said.
"It’s good for us in terms of making money, it’s good for generating profits, it’s good for generating domestic growth - all of that stuff makes this an area of investment that isn’t just strong in terms of portfolio returns, but also the nature of the investment."
The manager says that increasing allocation to small and micro-caps is going to be good for the world economy and for the global investment universe, and because of how under-researched many of the stocks are in the market area are he says it offers a wealth of opportunities for value and recovery investors.
“Many of the traditional value funds haven’t done that well and many of the growth funds have actually done better. I think it’s because sometimes people have either hoped to get recovery in the mining sector or recovery in the supermarket sector, and the danger is that those trends have become worse than people originally thought as it’s quite hard to time the bottom of these particular trends,” he said.
“I think it’s related to the fact that it’s too easy to say that a share price has gone down and therefore it’s going to recover. I think you’ve got to really look under the bonnet of stocks that are not just well-placed for recovery but are showing enough signs that you’re actually able to time the bottom in a decisive way. This would mean the share prices really could recover – I just don’t think we’ve got to that stage in the market yet.”
The manager believes that value stocks will take over the reins and outperform again – data from FE Analytics shows that the FTSE World Value index has comfortably outperformed the FTSE World Growth index over 15 and 20 years, despite only outperforming it in two out of the last 10 years on an annualised basis.
Performance of indices over 20yrs
Source: FE Analytics
Part of the reason that value investing has proved unpopular over recent years, according to Williams, is that many investors were burned during the financial crisis and have been more cautiously positioned since.
“It’s very difficult if you’ve bought the dips a couple of times and you’ve found that the water is too cold – you stay on the side and don’t get into the swimming pool after you stand back a couple of times,” he said.
“I think there is a lot of people sitting on the side-lines. The key issue as a fund manager isn’t just to take the risk on willy-nilly, you’ve really got to be very sure-footed about why you’re taking a risk on behalf of your clients and I think that’s not just driven by the share prices and hoping to get lucky when you buy.”
“It’s ultimately driven by cash generation and companies exhibiting dividend growth even when the world is not growing. If you keep your eye on that, even if you don’t get your timings spot on, you will generally make money.”
Since the turn of the millennium, Gervais has outperformed his peer group composite by 153.99 percentage points with a total return of 388.11 per cent.
Performance of manager vs composite since 2000
Source: FE Analytics
He also achieved a total return of 12.81 per cent in 2015, compared to his peer group’s average return of 9.17 per cent and the FTSE All Share’s return of 0.98 per cent.
