The difficult start to 2016 means that there are plentiful value opportunities in markets today, according to Henderson’s Chris Burvill, who has been adding to areas such as financials as stock markets sold off.
As many commentators have pointed out in recent months, value investing as a style has underperformed growth investing for a number of years after the financial crisis left many wary of holding stocks perceived as being riskier and loose monetary policy pushed money towards defensive stocks.
The graph below shows the performance of the MSCI AC World Growth and MSCI AC World Value indices since 1 January 2009. As can be clearly seen, value has lagged growth by around 35 percentage points over this time.
Performance of indices since 1 Jan 2009
Source: FE Analytics
A number of investment professionals have argued that value now seems to be due a rebound, after such a prolonged period of underperformance. R&M UK Equity Income manager Dan Hanbury, for example, has tilted his fund towards value stocks after saying “the next big trade” will be backing this style, while Invesco Perpetual’s Martin Walker thinks 2016 is the year the style bias in the market will reverse. 
For his part, Burvill (pictured) agrees that value could soon start to look interesting: “Value investing has broadly been out of favour since 2009, with markets tending to reward more of a ‘quality growth’ approach – holding larger, highly cash-generative companies that are expected to grow at a faster rate than the overall economy.”
“Last year in particular growth names tended to fare better. There are, however, now signs that the tide is turning with ‘value’ investing potentially better suited to the environment ahead. Everything in markets is cyclical. The real question is when, and in my view we are already seeing conditions in place for a return.”
The manager points out that is not common for the valuations of companies often move out of line, then mean revert back to their normal range. On occasion, valuations can move “excessively” away from normal levels as investors latch onto trends in the market.
“For example, we have recently seen the share prices for high profile ‘quality growth’ stocks rising significantly. This type of investor behaviour has led to the coining of the terms such as ‘Nifty 50’, a selection of 50 large-cap stocks on the New York Stock Exchange that drove the US bull market in the 1960s and 70s, and more recently, ‘FANGs’ – an acronym for Facebook, Amazon, Netflix and Google – among the most popular technology stocks in the modern world,” Burvill said.
“Investor enthusiasm for certain types of companies can see stock groupings take on a life of their own and tenuous contrasts are drawn between these ‘saintly’ companies and everyone else. The chart below suggests ‘growth’ companies may be in this phase.”
Price performance of indices since 1 Jan 2011
Source: FE Analytics
“While it is impossible to say ‘when’ prices of these stocks may revert back to more normalised levels, the stretch on valuations provides food for thought. At the very least, companies with high absolute valuations are likely to struggle to make much further headway unless the world economy grows.”
The manager’s portfolio activity in his £2.1bn Henderson Cautious Managed fund has been based around his “pragmatically bullish” views about the UK economy. The fund has had a relatively high weighting to cash (it currently stands at 13.1 per cent of assets) but has been redeploying this at times when the FTSE 100 dropped below 6,000.
Some recent buys were also funded by trimming positions in more defensive holdings like hospital equipment provider, Smith & Nephew, satellite communications group Inmarsat, business software provider Sage, and utilities group National Grid.
In keeping with Burvill’s above comments, he has been buying more value names.
“Value investing has become synonymous with certain out-of-favour sectors, such as oil, mining and energy. But in fact value opportunities can be found in every part of the market. Areas as diverse as retailing, aerospace and banking have been hit by fears that they are not just suffering a cyclical slowdown, but also have longer-term structural issues. I believe some of these fears are misplaced and therefore there are value opportunities,” he said.
“Portfolio activity included increasing exposure to oversold stocks, such as banking names Lloyds and Barclays, pub chain Mitchells & Butlers and property management firm British Land.”
“The oil sector looks interesting on valuations alone, and very interesting when there is a chance that OPEC may start to tighten the tap again, reducing supply. We suggested in November that the next move would be production cuts. The situation is complicated by the recent rise in US crude inventories, but we feel the oil price might now be establishing a floor. We are happy in our decision to hold oil stocks for the longer term. BP, Royal Dutch Shell and BG (soon to be merged into Royal Dutch Shell) represent our current exposure.”
Burvill has run the four FE Crown-rated Henderson Cautious Managed fund since its launch in February 2003, over which time it has made a 136 per cent total return. This puts it in the second quartile of the IA Mixed Investment 20%-60% Shares, where the average return has been 103.55 per cent, but below the FTSE All Share’s 201.97 per cent gain.
Performance of fund vs sector and index since launch
Source: FE Analytics
In keeping with its cautious mandate, the fund has tended to perform well in difficult markets. In 2008, for example, it lost just 9.28 per cent when the global financial crisis prompted a 29.93 per cent drop in the FTSE All Share.
Since launch, the fund has the lowest annualised volatility of its peer group and, at 6.76 per cent, has been around half that of the UK stock market. It is also first quartile when it comes to alpha generation and risk-adjusted returns, as measured by the Sharpe ratio.
Henderson Cautious Managed has a clean ongoing charges figure of 0.71 per cent and is yielding 3.10 per cent.
