Value looks likely to outperform in the near future following years of strong performance within the growth space, according to Standard Life Investments’ Bambos Hambi (pictured).
The multimanager, who heads up the MyFolio range at Standard Life Investments, says that he has altered the growth/value ratio across his portfolios recently but says this is unrelated to current market volatility.
Performance of indices since 2015
Source: FE Analytics
“Around 18 months ago we were very cognisant of the fact that growth has had a phenomenal period of outperformance - if you were a value manager you have most likely underperformed every year for the last five years as growth has been the style that’s been in favour,” he said.
“It’s not surprising in a low growth environment that premiums have been paid for companies that are able to deliver a good period of growth, so we’ve seen a number of these stocks do very well.”
After extensive research, Hambi found that value funds are likely to outperform when interest rates become higher and as such, thinks today’s environment in light of potential hikes from the Fed and the Bank of England present the opportunity to buy into value.
As such, the manager lists some of the funds he has been increasing his exposure to or adding to his portfolio over the last year.
This four crown-rated fund has had FE Alpha Manager Alex Wright at the helm since 2008, who was then joined by co-manager Jonathan Winton five years later.
The £368m fund adopts both a value and growth investing style by looking for cheap, unloved stocks that are entering a period of positive change and also have a degree of margin safety – this could be in the form of cash on their balance sheets, defensive earning streams or holding tangible assets.
The stocks’ potential for growth can also come from either changes on an industry level or stock-specific changes such as product alteration or cost-cutting.
This has stood Fidelity UK Smaller Companies’ portfolio in good stead over the medium term, as it has delivered a top-decile total return of 103.9 per cent over five years and has therefore almost doubled the performance of its average peer in the IA UK Smaller Companies sector.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Currently, the fund has a portfolio of 130 holdings, most of which are spread across the industrials, consumer products and financials sectors. It also has smaller holdings in basic materials and healthcare and has a 4 per cent cash weighting.
Fidelity UK Smaller Companies has clean ongoing charges figure (OCF) of 0.95 per cent.
JO Hambro UK Dynamic has a concentrated portfolio of 46 holdings and is benchmarked against the FTSE All Share Total Return index. It currently has a 56.7 per cent weighting in UK large-caps, 20.7 per cent in FTSE 250 stocks and 20.4 per cent in UK small-caps, although nine of its top 10 holdings are in blue-chips including HSBC, Shell and AstraZeneca.
It is headed up by FE Alpha Manager Alex Savvides, and over his eight-year tenure it has provided a total return of 99.8 per cent compared to its benchmark’s return of 46.12 per cent and its sector average’s return of 52.1 per cent.
The three crown-rated fund invests in distressed businesses that are in the process of solving their problems yet are still undervalued by the market, with Savvides believing that the companies they pick are overlooked due to short termism.
Primarily, the manager will pick well-known brands that are only enduring short-term issues and that pay dividends while retaining a focus on cash generation.
This investment style has won the fund a place on the FE Invest Approved list although the FE Research team warns that investors need to adopt a long-term approach to reap the benefits from the fund.
“The recovery process takes time to come to fruition, and then it needs to be acknowledged by the market – therefore, it is a strategy that requires patience,” they said.
JO Hambro UK Dynamic has a clean OCF of 0.74 per cent and yield 3.42 per cent.
Majedie UK Equity Income has four managers at the helm – Chris Field and James de Uphaugh launched the fund in 2003 and were then joined by Matthew Smith in 2010 and Richard Staveley in 2014.
Over the last decade it has achieved a top quartile return of 107.61 per cent compared to its sector average’s return of 59.64 per cent. It has slipped into the bottom quartile over the last year and six months though, which is likely to be a result of the fund’s value bias.
The three crown-rated fund, which is £3.1bn in size, aims to outperform the FTSE All Share index by around 2.25 per cent per annum over a rolling three-to-five year period and does this through both observing the broader macro environment and through detailed company research.
Each of the managers runs an equal segment of the portfolio and research area of FTSE 350 index, although Staveley is more of a traditional small-cap investor and focuses on the bottom 10 per cent of the market in terms of company size.
It has achieved a Square Mile rating of ‘AA’ for its experienced team and its “all-weather” investment process.
“Although the performance target may look low compared to higher octane UK equity strategies it must be remembered that the managers aspire to outperformance regardless of the market environment,” the team pointed out.”
“This is arguably one of the harder performance objectives.”
Majedie UK Equity has a clean OCF of 1.52 per cent and yields 1.91 per cent.
Invesco Perpetual European Equity Income
This four crown-rated fund has been run by Stephanie Butcher since the start of 2011, and aims to provide both growth and income through European equities excluding the UK.
It currently has regional overweights to Switzerland, Germany, the Netherlands, Spain and Finland versus its peer group composite, and is underweight all other regions. In terms of sector, the fund is spread across nine different areas of the market although its largest weighting is by far in financials at more than 30 per cent.
Since Butcher has been at the helm, Invesco Perpetual European Equity Income has provided a total return of 42.62 per cent, outperforming its sector average by 12.82 percentage points.
Performance of fund vs sector under Butcher
Source: FE Analytics
It also has a top-quartile Sharpe ratio, which measures risk-adjusted returns, over three years, although it has a bottom-quartile annualised volatility over the same time period, suggesting that investors should adopt a fairly long-term approach in order to maximise the fund’s potential.
Invesco Perpetual European Equity Income has a clean OCF of 0.94 per cent and yields 3.34 per cent.
Standard Life Investments UK High Alpha
Hambi has chosen this in-house fund for his MyFolio Managed range, which consists of five risk-adjusted portfolios.
“[Manager] Henry Flockhart has more of a background as a value manager… and we’ve found that it balances the portfolio in the Managed range well,” the manager said.
The £199m fund invests predominantly in UK large and mid-caps at roughly equal weightings, although it does hold a small amount in non-listed companies and in the UK small-cap space.
It has a reasonably concentrated portfolio of 55 holdings and aims to provide both a balance of income and long-term growth, which it does through stocks that Flockhart deems to be undervalued.
Currently, its largest weightings are in the likes of BT, HSBC, Prudential and Burberry.
While it is in the top quartile over the last decade, it has fallen into the bottom quartile over the last three and six months and has underperformed its average peer over the last year although, again, this is likely to be because of its value bias and the outperformance of growth stocks.
Performance of fund vs sector over 10yrs
Source: FE Analytics
Standard Life Investments UK High Alpha has a clean OCF of 0.92 per cent and yields 3.06 per cent.