In an article earlier this week, Old Mutual’s Ian Heslop told FE Trustnet that investors should hold funds that combine both growth and value strategies.
Parsons (pictured) agrees, and says investors would be wrong to limit themselves to either just out-of-favour value stocks or potentially expensive growth companies, as both styles are likely to go through periods of underperformance. “I completely concur,” he said. “Really, it comes down to the fact that I want to buy a company that is attractively priced and is going to grow over time,” he said.
“You are getting the best of both worlds then and you are paying for the active management element.”
“In order for those managers to deliver the greatest possible return or a good and growing income, then they need to be able to combine investment styles.”
“It’s a cyclical journey, because when a company’s valuation reaches a level that no longer justifies investment, they go back and find other companies that are growing and attractively priced.”
“It’s a virtuous circle and if there are managers that can do it, they are the ones I want to be invested with,” he added.
With this in mind, FE Trustnet looks at three funds that combine aspects of value and growth strategies in an attempt to deliver consistent outperformance.
L&G UK Alpha
Both Parsons and Gordon Smith, fund analyst at Kilik & Co, say that Richard Penny’s L&G UK Alpha fund is one of the best examples of a fund that employs both a growth and value approach.
“Penny aims to hold a concentrated portfolio of special situations and uses a barbell-type philosophy with stocks typically classified as deep value and strong growth,” Smith explained.
“Deep-value stocks are defined as ones that the market has fallen out of love with – well managed, profitable businesses with stable product lines, but where demand for shares has fallen and where the market has priced them at a discount.”
“Strong growth stocks are those that are aggressively increasing sales and profits by 15 per cent or more. Candidates typically have new products or services and the potential to become significantly larger businesses on a three- to five-year time frame,” he added.
Penny has managed the £189.9m L&G UK Alpha fund since its launch in May 2005.
According to FE Analytics, Penny’s fund is the fifth best-performing portfolio in the IMA UK All Companies sector over five years, with returns of 241.83 per cent, and has beaten its FTSE All Share benchmark by more than 150 percentage points.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund has also generated the second highest amount of alpha in the sector against its benchmark over that time and is a top-quartile performer in terms of its information ratio.
L&G UK Alpha has an ongoing charges figure of 1.67 per cent and requires a minimum investment of £500.
Schroder US Mid Cap
“I would also put Jenny Jones' US Mid Cap fund in that category,” Parsons said.
Parsons is a fan of FE Alpha Manager Jenny Jones’ fund, explaining that she looks for three different types of stocks.
The first type are mis-priced growth companies, meaning those with a price that understates the growth in the business's sales, margins or cash-flow.
The second are what Jones calls “steady eddies”. These are companies that display stable growth characteristics.
The final type of companies are turnaround stories, which are ones that had previously struggled but are now beginning to display growth due to internal or external factors.
Jones has managed the £962m Schroder US Mid Cap fund since April 2005. Over that time, the portfolio is the second-best performer in the IMA North America sector, with returns of 160.88 per cent. It has beaten its Russell 2500 benchmark in the process.
Performance of fund vs sector and index since Apr 2004
Source: FE Analytics
Although the fund has not drastically outperformed its benchmark over the cumulative period, Jones has beaten the index in seven of the last nine discrete calendar years. Schroder US Mid Cap beat its benchmark five years on the bounce between 2005 and 2009.
The fund has an OCF of 1.66 per cent and requires a minimum investment £1,000.
Invesco Perpetual Global Equity Income
Parsons says that investors should look towards the equity income sectors if they want funds that combine investment strategies.
“Most equity income funds have a similar approach,” Parsons said.
“They have to combine both value and growth as they want a stock that has an attractive valuation. This is because they want a management team that delivers a progressive dividend, but don’t want to be paying over the odds for the yield.”
“One fund we like is Invesco Perpetual Global Equity Income.”
The £490m Invesco Perpetual Global Equity Income fund is managed by the group’s chief investment officer, Nick Mustoe. He took over from Paul Boyne and Doug McGraw this time last year.
The fund had performed well under Boyne and McGraw and beat the IMA Global Equity Income sector in every year since its launch in March 2009. However, Mustoe has carried on the good work and the fund is the third best-performer in the sector over the last 12 months.
Performance of fund vs sector over 1yr
Source: FE Analytics
Invesco Perpetual Global Equity Income has a relatively low yield of 2.53 per cent, however its managers have been able to steadily raise its net distribution in each year since its launch.
It requires a minimum investment of £500 and has an OCF of 1.69 per cent.
