Ball says that while value investing has been out of favour since the financial crisis, the moment is ripe for funds that look for cheap stocks with strong earnings potential.
The manager is confident this will allow him to deliver soaring returns for investors over the next few years.
“Value works, which I guess is nothing new,” the manager said. “But value comes in clumps of performance, so when it turns, it tends to hang around for a while. We’re on the cusp of it turning, but this time value is late.”
“It’s late but it’s here and it’s going to hang around. This is the tip of the iceberg. We’re going to be delivering as much, if not more, than we did in the 1990s. We could easily triple or quadruple client money.”
Ball cites previous “value rallies” in the early 1990s and early 2000s as periods of exceptional outperformance for Templeton’s longstanding strategy. He believes history goes to show the fund, which is run using the principles of legendary investor Sir John Templeton, is about to have its day again.
The manager says value was also late in the early 1990s, coming through in 1992, 1993 and 1994.
During those years, the Templeton Global fund rallied ahead of the market, returning 60.12 per cent from the beginning of 1992 to the end of 1994. The FCA Offshore Recognised Equity International sector made 51.29 per cent and the MSCI World index gained 49.96 per cent, according to FE Analytics.
Performance of fund vs sector and index from 1992 to 1995
Source: FE Analytics
Ball says value came “roaring back” again in 2002 and held on until 2007, right before the market crash.
From the end of 2002, the Templeton fund rose well ahead of its peers, picking up 92.97 per cent while the sector gained just 69.34 per cent. The fund performed in line with the MSCI World index, which made 91.38 per cent.
Performance of fund vs sector from 2002 to 2007
Source: FE Analytics
These past cycles lead Ball to believe the Templeton fund is poised for another period of outperformance.
“Value is back. The rewards for being patient and also slightly contrarian can be very large indeed,” he said.
Although Templeton passed away in 2008, Ball says the principles of his investment style are still alive and well in the Templeton Global fund. The manager says the team still looks for stocks that are cheap and are capable of doubling in value, and will hold them for at least five years.
In Sir John Templeton’s words, the Templeton approach to value investing can be summed up in the following points.
1) Uncovering bargains
“If you search worldwide, you will find more and better bargains than by studying only one nation.”
2) Willingness to go against the grain
“The only way to get a bargain is to buy what most investors are selling.”
3) Value doesn’t equal contrarian
“The best bargains are not stocks whose prices are down the most, but rather those stocks having the lowest prices in relation to possible earnings power in future years.”
4) Value = buying pessimism and selling optimism
“Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.”
Over the long-run, the strategy has lagged the MSCI World index, but it has bounced back in the short-term. Templeton Global has outperformed the sector over the last one, three, five and 10 years, although it has lagged behind over five and 10 years.
Over the last three years, the fund has beaten the sector and index, with returns of 34.1 per cent.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
Templeton Global is currently underweight the US, which Ball believes is too expensive, and emerging markets. He prefers Europe instead, saying he likes the valuation differential between it and other regions of the world.
“Europe is on a 30-year discount to normalised price/earnings or price/book ratios. The discount we’re seeing in Europe is very large indeed,” he said.
Ball is also seeing a lot of value in the financial and healthcare sectors, with major pharmaceutical companies Roche and Bayer featuring in his top-10 holdings alongside French bank BNP Paribas, Dutch financial services firm ING Groep and Italian banking giant UniCredit.
The manager says investors can expect a 10 to 12 per cent return on equity in the next year from drug and healthcare stocks, as well as European banks and insurance companies.
“There’s still a lot of upside in banks,” he said. “[In the healthcare sector], a lot of risks that drove valuations down have changed. Research and development is back, new drugs are coming through. It looks as if the pharmaceutical sector is back on its feet,” he said.
“Now things that were headwinds two or three years ago are turning into significant tailwinds. Historically they have been much higher and they can go much higher.”
Templeton Global requires a minimum investment of $5,000 and has ongoing charges of 1.83 per cent.
Ball also runs the £194.7m Templeton Growth portfolio, which is domiciled in the UK. The fund has performed in line with the IMA Global sector and MSCI World index over five and 10 years, but has surged ahead over the shorter term.
Over the last 12 months the fund is up more than 10 percentage points ahead of the sector and index, gaining 29.38 per cent.
Performance of fund vs sector and index over 1 yr
Source: FE Analytics
The fund requires a minimum investment of £1,000 and has ongoing charges of 1.62 per cent.
To find out more about what investors can learn from Sir John Templeton, download the latest edition of FE Trustnet Investazine here.
