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Three funds set to benefit if value investing does make a big comeback

07 September 2016

Following on from a recent FE Trustnet article, here we look at three global funds that should benefit if the value investing style is about to return to favour.

By Alex Paget,

News Editor, FE Trustnet

Having been massively out of favour due to various factors such as loose monetary conditions, poor economic growth and a general sense of nervousness among investors, the value investment style has performed well in 2016 so far.

Indeed, while those managers who focus on unloved companies have tended to find themselves in the bottom quartile over the past five years or so, the MSCI AC World Value index is outperforming (albeit by a small margin) the MSCI AC World Growth index year-to-date.

Performance of indices in 2016


Source: FE Analytics

What’s more is that a number of market commentators believe value is about to make a big comeback – as a recent FE Trustnet article highlighted.

NN IP argues that this trend still has a long way to run as, due to signs the US is now in full recovery mode, the US Federal Reserve will raise interest rates faster than the wider market anticipates. In turn, this will lead to a rise in bond yields – again helping value stocks relative to more growth-orientated stocks that have benefitted from expensive fixed income markets.

“Admittedly, there have been several false dawns in the past two years, when cyclical optimism was drowned out by macroeconomic disappointment. Roads hardly go in straight lines. Today there are some encouraging signs in the US, where core inflation is slightly rising,” NN IP’s Nicolas Simar said.

“That could signal a regime change where valuation will start to play a bigger role.”

As such, in this article we take a closer look at the global funds that should benefit if the value style does make a comeback.


Kennox Strategic Value

One of the most value-orientated offerings in the IA Global sector is Kennox Strategic Value, which is run by FE Alpha Managers Geoff Legg and Charles L Heenan.

The managers run a highly concentrated portfolio and focus on companies they deem to be significantly undervalued despite sound underlying business franchises and that have asymmetric risk profiles – significant upside potential with limited downside risk.

If they don’t see enough value in the market, they will build up their cash weighting until more opportunities arise.

This approach has worked well over the longer term as, according to FE Analytics, it has been a top quartile performer since and beaten the MSCI AC World index by 20 percentage points since its launch in July 2007.

Performance of fund versus sector and index since launch


Source: FE Analytics

The managers have also been very good at protecting capital, such as delivering a positive return during the crash year of 2008.

It’s fair to say Kennox Strategic Value has been through a painful period over more recent times, though. As the value style fell out of favour, the fund underperformed in 2012, 2013, 2014 and 2015.

Nevertheless, the managers have stuck to their guns and as value investing has rebounded (along with some timely sector calls surrounding oil stocks and gold miners), the fund is one of the best performers so far in 2016 with gains of 27.59 per cent.

In their most recent update to investors, Heenan and Legg explained why they will be maintaining a more cyclically-orientated portfolio.

“Counter-intuitively, cyclical industries make the most attractive investments when profits are lower and capital spending is contracting – these are the types of opportunities that we wait patiently for, just as we have done with our gold miners and oil majors,” the managers said.

Kennox Strategic Value has a clean ongoing charges figure (OCF) of 1.14 per cent.


R&M World Recovery

A slightly higher octane value fund in the IA Global sector is R&M World Recovery, which has five FE Crowns.

Indeed, while Square Mile says it is an attractive fund for those looking for value investments due to manager Hugh Sergeant’s approach, it should only be held by those that are able to stomach volatility and drawdowns.

“This fund is a little like a whisky drinker who prefers his tipple not only neat, but at full cask strength. Investors need either an iron constitution or to recognise that a little may go a long way,” Square Mile said.

“We have a high regard for Mr Sergeant who has been investing in recovery type stocks throughout his career and he has built an enviable performance record running UK portfolios in a similar fashion. However, this is a high risk, high return strategy that really needs to be considered over the long term.”

According to FE data, the £182m R&M World Recovery fund has been a top quartile performer and beaten its MSCI AC World benchmark by a considerable margin since its launch in March 2013. However, as the graph shows, those returns haven’t been generated in a smooth fashion.

Performance of fund versus sector and index since launch


Source: FE Analytics

For example, it has had one of the sector’s largest maximum drawdowns – which measures the most an investor could have lost if they had bought and sold at the worst possible times – at 30 per cent in just three or so years.

That being said, it is designed to take advantage of more risk-on conditions (as shown by its weightings towards mining stocks and financials) and the fund has outperformed once again in 2016.

Over three years, the fund – which has an OCF of 1.23 per cent – has had an upside capture ratio of 126.73 per cent making it a top decile performer in that respect.


Veritas Global Equity Income

The final fund on this list is a value portfolio with a preference for dividend paying companies – Veritas Global Equity Income.

Like Kennox Strategic Value, it is run by an FE Alpha Manager duo (Andy Headley and Charles Richardson), has a decent long-term track record but has struggled over more recent times as value investing has not been in vogue.

According to FE Analytics, the £1.2bn fund has beaten both the IA Global Equity Income sector and the MSCI World index with returns of 181.6 per cent since its inception in February 2005.

Performance of fund versus sector and index since launch


Source: FE Analytics

It also outperformed in all but one of its first six calendar years including 2008 when it topped the sector with losses of just 9 per cent. However, its bottom decile numbers in 2013, 2014 and 2105 (which were largely generated due to the managers’ distaste for rallying US equities on valuation grounds) have severely hurt Veritas Global Equity Income’s longer term track record.

It has also damaged its perfect dividend track record, as the managers had to cut their total distribution to investors for the first time last year.

Nevertheless, the fund – which has an OCF of 1.16 per cent – is outperforming once again in 2016 and Square Mile says it is for long-term investor with a buy and hold strategy.

“This is a global equity fund with a difference ­ Veritas focus their efforts on providing clients with decent returns; they have no immediate concern about matching the returns of the wider market or about replicating exposures found in the benchmark,” Square Mile said.

“This results in a differentiated product that we feel should be of interest to many clients. The fund will almost inevitably lag towards the end of a bull market when valuation metrics become too rich but one of the keys to the success of the strategy is the managers' ability to deploy cash reserves once valuations correct and become more attractive.”

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.