Investors wanting to add the value investing style to their portfolio could consider funds such as R&M UK Equity Long Term Recovery, L&G UK Alpha Trust and Schroder Recovery, according to FundCalibre analysts.
Although growth has performed very strongly in recent years on the back of investor nervousness and loose monetary policy, value has come back strongly since the middle of 2016 and many investors are looking to lift weightings to the style.
Performance of indices over 6 months
Source: FE Analytics
In an article yesterday, FundCalibre research director Juliet Schooling Latter highlighted three growth funds – Baillie Gifford Global Discovery, Marlborough UK Micro Cap Growth and Rathbone Global Opportunities – that investors might want to look at.
“Longer term, we suggest investors have a balance of both growth and value funds in their portfolios to avoid style bias,” she added. “Now seems to be as good a time as any to dip a toe back into value waters.”
In the following article, we find out which three value funds Schooling Latter thinks investors should consider adding to their portfolio.
R&M UK Equity Long Term Recovery
First up is this £110.9m fund, which is managed by Hugh Sergeant and has a solid focus on investing in unloved companies that the manager believes have the potential to show significant improvement.
Schooling Latter said: “This fund aims to find companies that are yet to deliver on their promise – those experiencing below normal profit levels, which are depressing their valuations, but with the management capability to turn things around.
“Hugh, the fund manager, said last year that ‘now continues to represent the best opportunity to buy value type shares since the end of the TMT bubble in 2000’.”
Performance of fund vs sector and index since launch
Source: FE Analytics
R&M UK Equity Long Term Recovery has made a 202.45 per cent total return since launch in July 2008, putting it in the top decile of the IA UK All Companies sector. On a 12-month view, it’s the sector’s second best performer after making 23.56 per cent – almost 20 percentage points more than its average peer.
This has come with much higher annualised volatility and maximum drawdown than the average fund in the sector – it’s in the bottom decile for both measures. That said, it has the sector’s second highest maximum gain and is top quartile for risk-adjusted returns.
The fund’s biggest sector bet is to financials at 27.4 per cent of assets, with Lloyds Banking Group and Royal Bank of Scotland being two of its largest overweights. It is also overweight miners Anglo American and BHP Billiton.
R&M UK Equity Long Term Recovery has a clean ongoing charges figure (OCF) of 1.20 per cent and is yielding 1.38 per cent.
Richard Penny has managed the £160.3m L&G UK Alpha Trust since its launch in May 2005 and over this time has made a 259.20 per cent return – the seventh highest in the IA UK All Companies sector.
Performance of fund vs sector and index since launch
Source: FE Analytics
“Run by a straight-talking manager who describes himself as a ‘tight-fisted Yorkshireman’ when it comes to his investments, this market capitalisation agnostic fund looks for bargains in all corners of the market and particularly where the manager believes it is inefficient,” Schooling Latter said.
Penny holds a mixture of value and growth stocks in his portfolio, but expects holdings to double in value on a three-year time horizon. He tends to hunt among small-caps and AIM stocks, with more than 60 per cent of his portfolio in firms with a market cap of less than £250m.
Among the top 10 holdings are less well-known names such as support services firm Smart Metering Systems, financial software and consultancy group First Derivatives and software company Micro Focus International.
However, this is another fund that has been more volatile than its average peer. But its risk-adjusted returns are among the highest in the sector and FundCalibre says “this is a fund for those who want growth and are willing to accept some volatility to get it”.
L&G UK Alpha Trust has a 0.88 per cent clean OCF.
The £916.5m Schroder Recovery fund has been managed by Kevin Murphy and Nick Kirrage for just over 10 years; over this time, it has made 175.78 per cent and won a place in the IA UK All Companies sector’s top decile.
Performance of fund vs sector and index under Murphy and Kirrage
Source: FE Analytics
Schooling Latter points out that this is another fund for investors with an appetite for risk: “A true deep-value fund that invests in the cheapest and most unloved companies in the UK. Investors need to have a high tolerance for volatility, as this fund is liable to be at the bottom of the performance tables one year and the top the next.”
Illustrating this point, the fund made the sector’s lowest return in 2015 after losing 12.74 per cent but was its second highest return in 2016 after making 31.11 per cent. But again, its risk-adjusted returns have been some of the best in the IA UK All Companies peer group.
Schroder Recovery is running overweights to the financials, consumer services, utilities and basic materials sectors, with top holdings including HSBC, Royal Bank of Scotland and Barclays.
In addition, around 15 per cent of the portfolio is held in international names with 13.6 per cent in North American stocks like Apollo Education Group and 3.4 per cent in the Asian Pacific region.
Schroder Recovery has a 0.91 per cent clean OCF and is yielding 1.84 per cent.