A perfect buying opportunity has opened up for investors in value-orientated funds, according to Psigma’s Tom Becket, who says that the style will be highly profitable over the next decade or so.
Investors will no doubt be aware that value investing as a style has underperformed compared to the likes of growth and quality for a prolonged period of time, leaving many funds that focus on out-of-favour companies languishing in the bottom quartile of their respective Investment Association sectors.
There have been many reasons given for this trend, such as an overarching sense of nervousness since the global financial crisis and extra-loose monetary policy from central banks pushing investors towards high quality, cash generative growth stocks with reliable earnings and well-covered dividends.
According to FE data, for example, the MSCI World Value index has been consistently underperforming relative to the MSCI World Growth index since 2007.
Relative performance of indices since 2007
Source: FE Analytics
Nevertheless, in an article earlier today, Becket – who is chief investment officer at Psigma – explained why he thinks value funds have struggled for so long but made the argument why investors should no longer avoid them in their portfolios.
Though he says calling the bottom of value’s relative underperformance is difficult given the threat of deflation and other macroeconomic headwinds, he thinks funds that follow such a style are now very well placed to outperform over the longer term.
“We see [value investing] as a multi-year investment theme and a potential source of success in the rest of this decade,” Becket (pictured) said.
As such, in this article Becket highlights three value funds from around the world that he and his team are backing within their client portfolios and believe can deliver strong outperformance over the next 10 years.
“The value opportunities we have referred to exist across all markets at this time, but some of the biggest dislocations appear in European and Asian equity markets,” Becket said.
“In Europe, there is a mighty valuation divide between those companies perceived as safe and those deemed risky, because of their cyclical nature. Our view is not that you should go out and buy a load of optically cheap shares because a number of them will be poor quality companies and “value traps”.”
“But there will also be winners discarded amongst the rubble and in our portfolios, we are explicitly investing in a long-term value theme through R&M World Recovery, which is heavily weighted towards Europe at this time.”
R&M World Recovery was launched by Hugh Sergeant in March 2013, with the manager owning companies he believes will benefit from a recovery in company profitability over the medium and longer term.
The fund got off to a flying start in 2013 as investor appetite for risk was high, but underperformed in 2014 as growth stocks reasserted their dominance.
According to FE Analytics, the £150m fund is still outperforming the IA Global sector and its MSCI AC World benchmark since launch, though. It has made 46.9 per cent over that time, putting it in the top quartile and 20 percentage points ahead of the index.
Performance of fund versus sector and index since launch
Source: FE Analytics
It is a very different-looking fund to many of its peers, with Japan its largest regional bet and the likes of Rio Tinto, BHP Billiton and Anglo American featuring in its top 10 holdings. The fund has a clean ongoing charges figure (OCF) of 1.25 per cent.
BlackRock Asian Growth Leaders
Investors are often hard pushed to find a value-orientated fund in emerging markets and Asia given the historical outperformance of portfolios that invest in quality growth stocks.
However, given how out-of-favour developing world equities have become recently, Becket says investors should look for funds in the space that have at least some tilt towards value stocks. He, for example, is using Andrew Swan’s BlackRock Asian Growth Leaders fund for his exposure.
“In Asia, the tumultuous last few years and rabid Sionphobia that exists in the western world has led to indiscriminate weakness in Asian markets and some wonderful opportunities now exist to exploit real growth areas within the region,” he said.
“Certainly the outlook is challenging, as China attempts to rebalance, but those fears have been overdone in some valuations of cyclical parts of the market. A favoured position is BlackRock Asian Growth Leaders.”
According to FE Analytics, the $859m fund – which sits in the offshore universe – has returned a hefty 59.1 per cent since its launch in October 2012, more than tripling the gains of its benchmark in the process.
Performance of fund versus index since launch
Source: FE Analytics
The fund is overweight the likes of consumer discretionary, oil and basic material stocks compared to the index – reflecting Swan’s value tilt.
Nevertheless, many investors will prefer to play Asian equities via the likes of Stewart Investors who focus on the highest quality names in the region and considerably outperformed as a result. However, Becket says investors should be wary of such a strategy.
“Quality companies are by far the most expensive they have been relative to cyclical value companies in the recent past. This is the opposite to what was the case before the global financial crisis, when peoples’ appetite for risk was the complete inverse of where we are today.”
BlackRock Asian Growth Leaders has an OCF of 1.11 per cent.
Finally, Becket says Japan is an area where value managers can add heaps of value over the medium to longer term.
“Japan has also suffered in recent months, as investors have been weighed down by macroeconomic concerns over Asia,” he said.
“However, the major sell-off suffered by all cyclical companies over the last year has meant that many of the corporate success stories are being overlooked and we have recently added to our exposure in Jupiter Japan, adding to our Japanese overweight.”
“In Japan, the wholesale purchase of smart beta ETFs by the omnipotent government pension fund (GPIF) has created a major distortion between the valuations of lower volatility growth stocks and cyclical opportunities.”
He added: “Japan should be a happy hunting ground for value investors in the coming years.”
Simon Somerville has managed the £583m Jupiter Japan Income since its launch in September 2005.
According to FE data, it has been the fourth best performing member of the IA Japan sector over that time with gains of 75.44 per cent, beating the TOPIC by close to 20 percentage points in the process.
Performance of fund versus sector and index under Somerville
Source: FE Analytics
It has been top-quartile for its alpha generation relative to its benchmark, maximum drawdown, risk-adjusted returns (as measured by its Sharpe ratio) and annualised volatility since Somerville has been at the helm.
The fund has a bias towards small and mid-caps (some 37 per cent of the portfolio is in that area of the market) and Somerville’s largest sector weightings include industrials, consumer goods and financials. It yields 2.3 per cent and has a clean OCF of 0.99 per cent.
