JOHCM Europe Select Value, Fidelity Asian Special Situations and Schroder Specialist Value UK Equity are among some of the value funds to have achieved top-quartile total returns relative to their peers over the last decade, according to data from FE Analytics.
This comes following a recent blog entry from Schroders equity investment specialist Andrew Williams who, referencing the famous quote from Game of Thrones, detailed why “winter is coming” for highly-valued growth stocks.
Reasons he gives for why growth plays could struggle include the valuation gap between “racy” US tech stocks versus UK consumer staple stalwarts, the fact growth stocks have rallied significantly already this year and classic behavioural bias - which he believes echoes the same sentiment seen during the dotcom bubble at the turn of the millennium.
“History suggests this cannot persist forever and, in the past, a dislocation in the market such as we are now seeing has been a precursor to value outperforming as expensive growth companies withdraw to lower valuations,” he said.
“One line from Game of Thrones could serve as a useful warning for growth investors: ‘If you think this has a happy ending, you haven’t been paying attention’.”
As such, we decided to look at the ‘value’, ‘recovery’ or ‘special situations’-labelled funds in the Investment Association universe which have indeed proved their worth over the course of the last decade relative to their average peer.
Out of 55 eligible funds, 10 (or 18 per cent) have managed to achieve top-quartile returns over the last decade and these are spread across five IA sectors.
Within the IA Asia Pacific Excluding Japan sector, 100 per cent of value, recovery or special sits-labelled funds with 10-year track records achieved a top-quartile return relative to their average peer over the last decade (although there is only one eligible fund in the market area).
The £1.6bn Fidelity Asian Special Situations fund has four FE crowns and, over 10 years, has outperformed its sector average and benchmark by 55.77 and 10.77 percentage points respectively with a total return of 178.48 per cent.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Manager Suranjan Mukherjee – who was appointed to the fund in 2012 but has worked at Fidelity for 13 years – aims to provide long-term growth through bottom-up stock selection. He specifically likes companies which have established themselves as global leaders through technology or are benefitting from long-term themes or turnaround situations.
The two sectors with the second-best level of success when it comes to their value and recovery funds are IA UK All Companies and IA UK Smaller Companies sectors.
Within the former, the best-performing fund over the last decade is the five crown-rated Liontrust Special Situations fund, which has returned 214.43 per cent over the last 10 years compared to its average peer and benchmark’s respective returns of 78.85 and 80.14 per cent.
FE Alpha Manager duo Anthony Cross and Julian Fosh adopt a multi-cap approach to stock selection and use their Economic Advantage process, which focuses on finding companies with hard-to-replicate characteristics such as intellectual property, strong distribution channels or significant recurring business. The £2.7bn fund’s largest holdings are RELX, Unilever and Reckitt Benckiser.
Next in the sector for its 141.45 per cent total return over 10 years is Jupiter UK Special Situations, which has five FE crowns and has been managed by Ben Whitmore since 2006.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The £1.7bn fund has a concentrated portfolio of 40 holdings – 60.6 per cent of which are large caps, 23.9 per cent of which are mid caps and 5.9 per cent are small caps.
Whitmore aims to outperform the FTSE All Share index by between 2 and 3 per cent over five-to-seven year periods. He seeks companies which offer the most lucrative combination of high return on capital versus low valuations.
The third best-performer in the IA UK All Companies sector is Fidelity Special Situations, which has outperformed its average peer and benchmark by 44.14 and 42.85 percentage points respectively over the last decade with a total return of 122.99 per cent.
The four crown-rated fund has been managed by FE Alpha Manager of the Year Alex Wright since 2014, although he has been managing money at Fidelity for 14 years.
The £3.2bn fund utilises Wright’s smaller companies experience and has just a 23.6 per cent weighting to large caps compared to the FTSE All Share’s 79.6 per cent weighting. Its largest positions include global bank Citigroup, building materials firm CRH and defence & aerospace conglomerate Ultra Electronics Holding.
The fourth fund in the sector to outperform its average peer and sector over the last decade is Schroder Specialist Value UK Equity with its total return of 118.31 per cent.
The £92m fund, which is headed up by FE Alpha Manager duo Nick Kirrage and Kevin Murphy, has a highly-concentrated portfolio of 31 stocks and a marked overweight to financials, with HSBC, RBS and Barclays all appearing in its list of top 10 largest holdings.
That said, the fund has no particular bias to any industry, size or company and can be positioned as the managers see fit.
The fifth fund in the IA UK All Companies sector to make the cut is BlackRock UK Special Situations, which is co-managed by Roland Arnold and Luke Chappell (although they have only been at its helm since 2012 and 2015 respectively).
Over 10 years, the £711m fund has outperformed its average peer and the FTSE All Share index (which it is not benchmarked against) by a respective 35.02 and 33.73 percentage points with a total return of 113.87 per cent.
The fund tends to have an emphasis on small- and medium-sized companies although it currently holds Rio Tinto, RELX and British American Tobacco as its largest individual constituents; its top 10 holdings account for approximately 33 per cent of the portfolio.
Over in the IA UK Smaller Companies sector, the only value, recovery or special sits-labelled fund to achieve a top-quartile return over 10 years (only two have long enough track records) is Marlborough Special Situations, which has been headed up by star manager Giles Hargreave since 1998. He was joined by co-manager Eustace Santa Barbara in 2014.
Over the last decade, the four crown-rated fund has returned 233.03 per cent compared to its average peer’s return of 127.96 per cent.
Performance of fund vs sector over 10yrs
Source: FE Analytics
Hargreave and Santa Barbara prioritise meeting management teams of prospective investments and, in a bid to minimise risk, will not allow any company to grow to more than 2 per cent of the fund.
The IA Europe ex UK sector is third on the list, with 40 per cent of its value funds with 10-year track records achieving top-quartile total returns.
The top-performer in the market area over this time frame is JOHCM European Select Value, which has achieved the second-highest returns out of the whole sector over the last decade.
The five crown-rated fund has been headed up by FE Alpha Manager Robrecht Wouters since 2003 and co-managed by Luis Fañanas since March this year.
Over 10 years, the £1.7bn fund has outperformed its average peer and benchmark by 76.58 and 87.65 percentage points respectively with a total return of 162.48 per cent.
Wouters and Fañanas have a preference for attractively-valued companies that generate high returns on capital; this strategy tends to lead to an underweight in capital-intensive areas of the market such as financials and commodities.
The only other value, recovery or special sits-labelled fund in the sector to achieve a top-quartile return over 10 years is MFS Meridian European Value. The five crown-rated fund is domiciled in Luxembourg and has €5.2bn assets under management, which is held in a relatively concentrated portfolio of 60 stocks.
Managers Benjamin Stone, Pablo de la Mata and Gabrielle Gourgey adopt a multi-cap approach to stock selection and describe their process as “patient” and “contrarian”.
Over the last decade, the fund has returned 153.22 per cent compared to its sector average and benchmark’s respective returns of 85.9 and 74.83 per cent.
The tenth and final value, recovery or special sits-labelled fund to achieve a top-quartile return over the last decade resides in the IA North America sector.
Fidelity American Special Situations has been managed by Angel Agudo since 2012 and aims to find companies trading on below-average valuations and which have significant recovery potential with little deterioration risk.
Over 10 years, the £1.3bn fund has outperformed its average peer and benchmark by 41.33 and 9.84 percentage points respectively with a total return of 210.77 per cent.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The FE Research team, which has awarded the fund a place on its FE Invest Approved list, said: “It is reassuring to see that this valuation-oriented approach does not involve running big themes for extended periods; he is happy to trim winners and reinvest in better opportunities that are on his watch list or appearing on his valuation screens.”