One of the major themes in financial markets over recent years has been outperformance of the growth investment style over value, although some now expect this to switch around.
According to FE Analytics data, the MSCI United Kingdom Value index has made a 48.16 per cent total return over the past five years, lagging the MSCI United Kingdom Growth index by some 14 percentage points.
A number of reasons for this have been suggested, including continued investor nervousness amid the central bank-fuelled market rally, demand for income driving flows towards growth stocks and short-termism moving investors away from ‘buy-and-hold’ strategy usually implemented by value.
Performance of indices over 5yrs
Source: FE Analytics
However, value has rallied in 2016 and started to outperform growth. Our data shows that the value index has posted a 19.91 per cent gain over the year to date, against an 11.27 per cent total return from the growth index.
Darius McDermott, managing director at FundCalibre, said: “The one rotation we seem to have been waiting for signs of for some time, but which still remains elusive is the move from growth to value. Whilst miners and oils have had a short rally, banks have lagged and growth stocks have continued to soar.
“A clear catalyst for this rotation to begin in earnest is yet to emerge, but if you think value is on the cusp of coming back into fashion, now may be a good time to invest in a company that's ‘cheap’, as long as you're prepared to be patient.”
In the following article, we look at three UK value funds that McDermott rates highly.
Investec UK Special Situations
First up is this £1bn fund, which has been headed up by value investing veteran Alastair Mundy since August 2002. Over this time, it has outperformed its average IA UK All Companies peer and the FTSE All Share with a 267.02 per cent total return.
Performance of fund vs sector and index under Mundy
Source: FE Analytics
“Alastair Mundy has a well-earned reputation as one of the most disciplined and successful contrarians operating in the UK market today,” McDermott said. “His approach tends to be especially successful during turning points in investor sentiment when investment fashions change.”
The manager’s approach focuses on finding contrarian investments that are showing long-term potential while keeping a close eye on downside risk. Mundy strives to apply his approach in a very consistent manner and is at pains to avoid being distracted by the ‘noise’ of other analysts and the media.
Top holdings at the moment include HSBC, GlaxoSmithKline, Royal Dutch Shell, Lloyds Banking Group and Grafton. It’s largest sector overweight is to banks, followed food & drug retailers and general retailers.
Investec UK Special Situations has a clean ongoing charges figure (OCF) of 0.85 per cent and yields 2.57 per cent. It also appears in the FE’s aggressive, balanced and cautious AFI portfolios, which are constructed by a panel of leading financial advisers.
Richard Penny runs this £177.4m fund with a multi-cap approach, selecting investments from all parts of the market cap spectrum. This means there are a number of less familiar names in its top 10, including Smart Metering Systems, First Derivatives and Micro Focus International.
Since he launched the fund in May 2002, L&G UK Alpha has made a 235.40 per cent total return and beat its average peer and the FTSE All Share by a wide margin in the process. Out of 166 funds in the sector, it is ranked ninth over this time frame.
Performance of fund vs sector and index since launch
Source: FE Analytics
McDermott said: “Run by a manager with a lifelong passion for investment, a calm confidence in his stock-picking, and the track record to back it up, the fund has proven rewarding for adventurous, long-term investors. This is a fund for those who want growth and are willing to accept some volatility to get it. It is very different from most UK funds.”
Penny invests in a mix of growth and recovery stocks but is primarily on the hunt for those that he expects to double in value over three years. In order to do this, he looks for companies ignored by other investors and pays attention to small-caps and AIM stocks.
L&G UK Alpha has a 0.88 per cent clean OCF.
McDermott’s final pick is this £504.4m fund, which was launched by FE Alpha Manager Henry Dixon after he ran Matterley’s flagship value strategy. Since launch in November 2011, Man GLG Undervalued Assets has beaten its average peer and the FTSE All Share with a 22.90 per cent total return.
Performance of fund vs sector and index since launch
Source: FE Analytics
“An overtly value-driven approach with an unusual screening process, it has delivered results for Henry at Matterley,” McDermott said. “The same process is now being applied at GLG Partners, whose better access to companies will be an added bonus.”
Dixon’s process revolves around finding companies that are trading below his estimate of their asset value or those where the market is undervaluing their profit stream relative to the cost of capital. Thorough analysis of companies’ balance sheets is essential to this process.
The fund’s largest holding is Imperial Brands, followed by John Laing Group, Playtech, Aviva and Bellway.
Man GLG Undervalued Assets has a 0.90 per cent clean OCF and is yielding 2.05 per cent.