Markets have been upended by a recent shift into value stocks after more than a decade of domination from the growth style, which has seen many investors seeking out attractive value funds.
This rotation was catalysed by the announcement of several effective Covid vaccines in November last year. It meant investors began to forecast a recovery period and stronger economic growth as the vaccine would restore some pre-Covid normality, leading investors out of growth stocks and into value and cyclical sectors, which typically do better in recovery environments.
The performance of growth versus value over the past six months – since just before Pfizer Monday – shows the rotation out of growth and into value is apparent.
Performance of MSCI World Value vs MSCI World Growth indices over six months
Source: FE Analytics
With this in mind Trustnet asked market experts which value funds they’d recommend for capturing this resurgence in value.
Jupiter UK Special Situations
The first fund is Ben Whitmore’s £2bn Jupiter UK Special Situations fund, which was picked by three market experts.
Whitmore runs a “tried and tested approach”, according to Gill Hutchison, research director and co-founder of The Adviser Centre.
This is “truly contrarian” process, according to Hutchison, grounded in Whitmore’s belief that the key determinant to future returns is whether the valuation paid for a security is high or low relative to its long-term history.
“In other words, they try to capture a ‘value premium’,” Hutchison said.
Indeed, Whitmore has long been a proponent of value investing, as AJ Bell’s Laith Khalaf called him “a disciplined disciple of the value school of investing”.
The AJ Bell analyst said: “Whitmore doesn’t make forecasts, believing them to be little more than crystal ball gazing. Instead he analyses company fundamentals, in particular valuations and balance sheets, the latter to stop the fund falling into value traps and to ensure, the financial strength of the companies he’s investing in.”
Seeking lower valued and out of favour companies this generates a portfolio that is highly benchmark agnostic.
Combining this with Jupiter UK Special Situations’ low turnover and concentrated approach means “investors should expect an idiosyncratic risk and return journey, alongside pronounced and permanent value characteristics”, according to John Monaghan, head of research at Square Mile Investment Consulting and Research.
“As is typically the case with value-styled funds, investors may need to exercise patience and withstand long periods of fallow performance,” Monaghan said. He added that these funds can equally see “powerful periods of performance, often in short order, when the tide turns”.
But focusing on the long-term trajectory, Monaghan said the Jupiter UK Special Situations fund has the ability to generate outperformance, adding that the strategy “should be appealing to investors with a longer-term investment horizon”.
Over five years the fund has made a total return of 42.02 per cent, underperforming against the IA UK All Companies sector (43.08 per cent) but outperformed its FTSE All Share benchmark (38.22 per cent). This underperformance shouldn’t be too surprising, given how value has lagged in recent years.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The fund has an ongoing charges figure (OCF) of 0.76 per cent.
Man GLG Income
The next value fund pick also focuses on the UK: Man GLG Income, which resides in the IA UK Equity Income sector.
Teodor Dilov, fund analyst at interactive investor, said that it could be a decent component to an investor’s core portfolio. He explained that by taking a multi-cap approach - with a bias to UK small-caps - Man GLG Income doesn’t hold many of the well-known names found large-cap income funds.
Dilov said: “As the fund does not own many of the typical names owned by larger dividend-focused funds, it may experience larger volatility of returns than the peer group and therefore might be suitable to complement a core portfolio.”
Manager Henry Dixon focuses on a company’s recovery prospects and dividend growth rather than absolute yield.
Over five years the fund produced the sixth best returns out of the entire IA UK Equity Income sector, making a total return of 46.32 per cent.
Dilov noted that these were “exceptional returns”, considering how out of favour value has been during that time.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The £1.9bn Man GLG Income fund had an OCF of 0.90 per cent and a yield of 4.07 per cent.
Schroder Global Recovery
Ben Yearsley, co-founder and director of Fairview Investing, said: “There aren’t many value trusts left now so it has to be a fund – and even then there aren’t many left standing.”
But amongst the value portfolios available Yearsley highlighted the Schroder Global Recovery fund.
Co-managers Andrew Lyddon, Nick Kirrage and Simon Adler are part of Schroder’s value investment team, or what Yearsley called “the premier team today”.
Schroder Global Recovery invests in a combination of equity income and recovery value, focusing on unloved and undervalued stocks where the managers believe the market has overlooked the potential for recovery.
“Value investing is hard work and often uncomfortable buying shares others are ditching. They run various basic screens to give them a set of cheap stocks versus history then deep dive into what they might have missed and why the share price might or might not recovery. They then quantify the upside to see whether the risk justifies the potential reward,” Yearsley said.
“Ultimately they are mean revisionists. This time last year they were saying it was the best environment for a decade.”
Schroder Global Recovery has underperformed compared to its sector peers and benchmark, making a total return of 66.03 per cent. Again, this was in a period when value funds found it hard to make progress.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund has an OCF of 0.93 per cent.
Fidelity Special Situations
The final pick is one which Jason Hollands of Tilney Investment Management Services has recently added to his own ISA: the Fidelity Special Situations fund.
Hollands said: “This is the fund that I’ve added to in my own ISA recently, as I believe UK-value funds should finally have strong run as the economy recovers after years in the doldrums.”
FE fundinfo Alpha Manager Alex Wright and Jonathan Winton look for stocks which have been missed and undervalued by the market that they feel could be re-rated. Although, Hollands added, “importantly, Wright looks for businesses where the downside risk is limited and therefore he does not invest in more speculative, bombed-out names”.
The fund’s investment opportunities typically fit into four investment categories: companies that have performed poorly but are implementing turnarounds; growth companies on relatively low valuations; companies that have divisions that are hidden jewels whose potential is not fully recognised by the market; and businesses with an above average chance of being involved in takeovers.
While the fund has a multi-cap mandate, Hollands said that Wright has a “sizeable weighting” in small-cap stocks, “a part of the market where he first cut his teeth as a manager”.
Fidelity Special Situations underperformed against its peers over five years but outperformed its benchmark during that time, shown below. It made a total return of 39.53 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
It has an OCF of 0.91 per cent.