There is always a reason for a stock to be cheap and always a reason it could stay cheap.
Nevertheless, the data shows that if you consistently buy cheap stocks, your portfolio will hugely outperform over the longer term.
High-yielding stocks can be used to measure "value" stocks, as a higher yield relative to peers implies a lower price, all else being equal.
Our data shows that the FTSE 350 Higher Yield Index has hugely outperformed the FTSE 350 Lower Yield Index since the start of our data in 1985.
Performance of indices since 31 Dec 1985
Source: FE Analytics
Value stocks have made 1,900.28 per cent over that time, while the more expensive stocks have made 840.79 per cent.
However, investors need to be careful. There have been long periods when value stocks have underperformed.
If you had put your money in them five years ago, our data shows they would have only just caught up with the index, having lagged for the first two years of that time – broadly speaking during the recovery from the 2008 crash.
Performance of indices over 5yrs
Source: FE Analytics
Although the last three years have favoured value stocks overall, in the past 12 months – when the markets have seen a broad recovery across the board similar to the one they saw in 2009 and 2010 – they have also slightly lagged.
The long-term story is compelling and there are plenty of exchange traded funds (ETFs) that buy value stocks on the American market, and even some that look to emerging markets, China and Europe.
The iShares S&P 500 Value Index, for example, has outperformed the S&P 500 significantly over 10 years, making 68.65 per cent while the index has made 37.88 per cent. Results have been less impressive over three- and five-year periods.
However, there is as yet no option for the UK market. Within the UK the best way to get access is through active managers with a rigorous value philosophy.
Three of the best
Jupiter UK Special Situations
This fund, which has five FE Crowns, has been managed by Ben Whitmore (pictured below) since November 2006.
Since then it has made 73.51 per cent while the FTSE All Share has made 42.1 per cent, according to our data.
Performance of fund vs sector and benchmark since Nov 2006
Source: FE Analytics
One of Whitmore’s more interesting bets has been RBS, which is a top-10 holding in his fund despite being a stock most private investors have run a mile from since the Government took it over.
The manager takes a contrarian approach and has been shifting his fund round to stocks that derive their earnings from the West rather than faster-growing, developing Asia.
The fund requires a minimum initial investment of £500 and has ongoing charges of 1.76 per cent.
Schroder Recovery
This £379m fund has almost doubled the returns of the FTSE All Share since Nick Kirrage and Kevin Murphy took over in July 2007.
It has made 105.83 per cent while their benchmark has made 55.59 per cent.
Performance of fund vs sector and benchmark since July 2006
Source: FE Analytics
AstraZeneca is the pair’s current biggest bet at 4.4 per cent of AUM. The company is under new management this year and is seeking to boost its supply of new drugs and restructure to cut costs.
Schroder Recovery requires a minimum initial investment of £1,000 and has ongoing charges of 1.52 per cent.
Fidelity Special Situations
This is a fund that is rebounding strongly following a period of poor performance after manager Sanjeev Shah (pictured) took over in 2008.
It is now in front of the benchmark over three years, however, and has powered ahead over the past 12 months, as value stocks have been outperforming.
The fund has doubled the returns of the All Share, making 40.39 per cent compared with the index’s 19.42 per cent.
Shah is benefiting from holding on to the banks during a rough patch for the sector and has seen a remarkable turnaround.
The fund is top quartile this year as it was in 2012, having been in the fourth, third and third quartiles in the previous three years.
It is available with an initial investment of £1,000 and has ongoing charges of 1.7 per cent.
