Quality-growth managers have outperformed since the financial crisis in 2008 as investors have sought safety in ‘bond proxies’ such as tobacco and utilities. 
As such, generally the best performing funds over the last decade have been those with exposure to these stocks, but 2016 has seen a change to this trend, with value making a comeback for the first time in years.
As the below graph shows, value stocks are on course to outperform their growth rivals for only the second calendar year since 2008.
Performance of indices over 7yrs
Source: FE Analytics
This switch in fortunes has meant a number of funds that investors have stuck by for the majority of the past decade could now be set for a period of underperformance should the rotation continue.
In a recent article FE Trustnet highlighted reasons why quality growth could start to underperform over the coming years owing to an aggressive and sustained rotation towards the value investing style.
One such fund that could be affected by this is CF Lindsell Train UK Equity, run by FE Alpha Manager Nick Train, which is on course to end the year returning less than the FTSE All Share – the first time this has happened since 2007.
Whitechurch Securities head of research Ben Willis said: “Nick Train’s fund has been a massive beneficiary of the QE-fuelled low growth, low inflation environment. He is focused on high quality growth stocks – cash compounders and companies that can provide visible and sustainable growth.
“He readily admits himself that he doesn’t know whether to feel ashamed or proud that he has barely changed the portfolio in four years. However, as these stocks have been in high demand from investors in recent years, prices have become very high.”
“As such, they may offer low earnings risk but they have high price risk. With inflation expectations ticking up, there is a risk that the growth on offer from these stocks may not provide a real return, hence why we have seen a recent return to favour for value.”
Below FE Trustnet asks commentators which fund an investor should consider alongside CF Lindsell Train UK Equity if they are worried about the future of quality-growth investing.
Willis says a value fund should help to balance out a portfolio and give investors the best chance to succeed in 2017.
“It is hard to say whether this is a sustained inflection point for value investors, but I would hold a value fund alongside Nick Train’s and that would be Schroder Recovery,” he said.
“The managers focus on price and are essentially looking for stocks that have fallen out of favour or are being ignored by the broader market.
“As such, the managers employ a value approach to investing with the price you pay at outset being the fundamental point.”
The £900m fund, run by Nick Kirrage and Kevin Murphy, has been a top quartile performer over one, five and 10 years in the IA UK All Companies sector despite the tough market conditions for value investors over this period.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Over the past five years the fund has returned 129.71 per cent, 62.21 percentage points ahead of the sector and 69.37 percentage points ahead of the FTSE All Share.
Last month, Kirrage said if investors were not considering rotating into value after a decade of underperformance then they never would.
“If value has been underperforming for 10 years, if you are not considering rotating now into value you are never going to do it,” he said.
“We all know you should buy low and sell high but bringing yourself to do this is hard.”
Willis says the long-term nature of the fund, with the managers looking to buy and hold positions for at least three years, gives them an advantage to see out returns.
“Given their investment philosophy, the managers tend to be contrarian in their approach, looking at companies that have suffered setbacks or profits warnings and this can lead to periods of short-term underperformance. However, the longer-term returns from the fund have been excellent.”
Much in the same vein at the previous fund, Premier Asset Management fund manager Simon Evan-Cook suggests FE Alpha Manager Alex Wright’s Fidelity Special Situations fund.
He said: “Wright’s value-driven approach acts as a complement to Nick Train’s high-quality style. We hold Alex’s smaller companies fund, but small caps aren’t to everyone’s taste, so his Special Situations fund is another option for those who are more comfortable with large-cap exposure.”
Again, the fund has performed particularly well over the last five years, returning 111.03 per cent despite its value bias.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Alex Wright has been in charge of the £2.8bn fund since 2014, taking over from Sanjeev Shah, and is ahead of the sector and benchmark over his tenure, returning 23.20 per cent.
Evan-Cook said: “It’s not so much that holding these two together will maximise returns, as ultimately one of the managers will outperform the other over the long term.
“So, with perfect hindsight, you’d be better off backing the one manager who generates the highest returns over the next 10 years. The rub, however, is that I, or anybody else for that matter, can’t tell you with any certainty which one that will be.
“What I can say is that I think both are excellent managers and I’d expect them to outperform the market comfortably over the long term.”
What’s more, he says, is that both should earn their outperformance over different parts of the market cycle given their differing approaches.
“The advantage of this is it makes your portfolio as a whole less volatile, as the fund that’s winning can compensate for the underperformance of the fund that’s losing,” he explained.
“Investors’ biggest mistake is often selling out of the market, or a fund with a particular style, at exactly the wrong time, but this blended approach is an easier ride psychologically and that reduces the likelihood of making this mistake.”
Rob Morgan, pensions and investment analyst at Charles Stanley Direct, suggests GVQ UK Focus could make for an interesting pairing with CF Lindsell Train.
Run by FE Alpha Manager Jamie Seaton, the £391m fund is another that has been in the top quartile in the IA UK All Companies sector over three, five and 10 years.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Over the past five years, the four crown-rated fund has returned 118.54 per cent, beating the sector and benchmark by 51.04 and 58.2 percentage points respectively.
“It’s a similarly concentrated portfolio [to CF Lindsell Train] but takes a different approach with exposure ranging from small cap companies to well-known FTSE 100 names,” Morgan said.
“Manager Jaime Seaton concentrates on earnings growth, valuation, de-gearing (reducing debt) and, importantly, the potential for corporate activity.”
The end result is a portfolio of what he describes as “high quality coveted assets” that he believes will be in demand “even in tough times”.
“I see GVQ UK Focus as a prime example of why, as fund selectors, it sometimes pays to look beyond the big names and uncover a smaller, more nimble fund,” he said.
“Performance has been excellent, partly as a result of merger and acquisition activity driving up the values of holdings. It offers an interesting alternative to larger, higher profile peers.”
The fund currently holds Shire, Sky and WPP among its top 10 holdings, all of which have been the subject of M&A discussions over the last 18 months.