Value having outperformed other investment styles in recent weeks, investors are beginning to question whether value stocks could be overdue for a longer period in the sun. Regardless, Unicorn Asset Management’s Peter Walls believes there are some compelling opportunities to be found in the value space.
Value's underperformance goes back to the financial crisis, while the growth style has continued to rake in gains. This month, however, that dominant trend was abruptly upended.
As many of the most popular companies endured a sharp sell-off, some of the most unpopular stocks enjoyed a startling rally.
Indeed, the MSCI World Value index has gone up by 3.39 per cent over the past month – in sterling terms – while its growth counterpart has risen by just 0.63 per cent.
Performance of indices over 1mth
Source: FE Analytics
The recent outperformance of value stocks is thought to have come as a result of a rebound in bond yields, making so-called ‘bond proxies’ seem less attractive and expensive.
The low rate environment has pushed investors in search of yield into bond proxies – which offer predictable returns and often low-risk income – but these too have now been bid up to high levels, explained Walls, who oversees the Unicorn Mastertrust fund.
As such, some of the previously unfavoured value companies suddenly present quite enticing opportunities.
“These are companies that everyone assumes are going to be disrupted out of business,” Walls pointed out.
The FE Alpha Manager highlighted oil majors, traditional banks and tobacco companies, all of which “have been taken down to very low levels”.
And yet many such companies are generating profits, he said.
“Where management has been alive to the challenges and been able to adapt, there are bound to be value in all sort of sectors,” he explained.
Value stocks have also been eschewed by investors with greater ESG (environmental, social & governance) awareness.
“There are also ESG-unfriendly companies whose share prices have been thrashed,” said Unicorn’s Walls. “The idea of never again owning an oil company or never owning a tobacco company is probably misguided because, if everyone keeps selling them, there will get to a point where a venture capitalist or private equity firm will come along and find that the cashflow will more than justify the cost of buying the business.”
However, investors should be very careful not to just look at sectors and decide which are in favour or out of favour, he said, using the beleaguered retail sector to make his point.
“We all know what the problems on high street are,” he said. “But if you look at the top performing retail companies, you find something like Next performing incredibly strongly against that backdrop.
“The company is coming from a low base and getting its transformation into the digital world.”
With the profound changes taking place in the economy, there are winners and losers in nearly every sector, the Unicorn Mastertrust noted.
“You just can’t generalise. You have to be more discerning about that process than ever before, because there are so many different factors at play,” said Walls. “But value does out. The worth of a company does eventually show itself.”
Over the past 18 months, Walls has been moving his global fund more towards value stocks, with a bias towards the UK market “which has been so out of favour as a result mainly of Brexit, with most investors switching out of UK-invested funds”.
“If you look at the IA UK All Companies sector and the IA UK Equity Income sector, you’ll see they’ve experienced net outflows for two to three years,” he said.
As can shown below, the IA UK All Companies sector has seen outflows of £2.8bn while the IA UK Equity Income sector has seen net outflows of £561m between July 2018 and July 2019.
Source: Investment Association
In addition, the manager also seeks value beyond the UK borders.
“I see some value in Asia, and I see a bit of value in Europe,” said Unicorn’s Walls. “I think Europe is probably a bit underappreciated, particularly in terms of its technology. Granted, it doesn’t have the big technology names—unless you think of Spotify.”
He said while Europe doesn’t have the great technology blockbusters, it does have great industrial technology businesses and “some really interesting robotic-type of technology that will transform the automotive and other engineering businesses in Europe."
However, while the value style has outperformed over the past month, Rupert Thompson, head of research at Kingswood Group, said it may not be a long-term trend.
Thompson said the rise in yields that fuelled the value resurgence is partly a rebound from levels which always looked excessively low and is also a reflection of better economic data.
“This bounce in value stocks could have further to run near term not least because they are unusually cheap compared to growth stocks,” he said. “However, we are sceptical that this is the start of a major period of outperformance by value which tends to do well in periods of either recession or strong economic growth.
“Instead, we expect global growth to remain sluggish over the coming year, albeit a bit stronger than of late,” Thompson added. “Moreover, while the rebound in bond yields could continue a bit further, rates look set to remain very low by historical standards for the foreseeable future. This again is much more supportive for growth than value stocks.
“Value fund managers should enjoy their moment in the sun because it may not last for too long.”
Unicorn Mastertrust is a fund of investment trusts targeting long-term capital growth through investment in a range of different strategies.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
The £94.9m, five-FE Crown-rated fund has returned 389.06 per cent since its December 2001 launch, compared with a 158.91 per cent gain for the average IA Flexible Investment peer and a rise of 287.48 per cent for the FTSE 350 Equity Investment Instruments benchmark. It has an ongoing charges figure (OCF) of 0.84 per cent.