One of the most popular ‘rules’ of investing is avoiding overpaying for a stock as one of the key determinants of returns is the original price paid for an investment. But which funds currently have the most in the FTSE 100’s cheapest names?
The price-to-earnings (P/E) ratio is one of the most commonly used metrics when valuing stocks. It divides the current share price of a company by its earnings per share of the past 12 months, with a lower number representing better value.
According to Bloomberg data, the FTSE 100 stock with the lowest P/E ratio is steel making and mining company Evraz at 4.39, followed by International Consolidated Airlines (5.18) and financial Standard Life Aberdeen (6.4). The 10 cheapest companies can be seen below.
Source: Bloomberg, as at 23 Oct 2019
Not all of these cheap companies are having a particularly good time at the moment. Over 2019 to date, Evraz has fallen 11.26 per cent in total return times while IAG (International Consolidated Airlines Group) is down 7.07 per cent.
But the remaining eight stocks have outperformed the FTSE 100’s 13.27 per cent gain for the year so far. Private equity firm 3i Group leads the pack as its up 44.60 per cent in 2019, while Taylor Wimpey has risen 37.13 per cent and Persimmon 35.76 per cent.
In this article, we have looked across the IA UK All Companies and IA UK Equity Income sectors to find out which of their members has the highest proportion of their portfolio in the 10 FTSE 100 stocks with the lowest trailing P/Es. Of course, this doesn’t mean these are the ‘most value’ funds out there – just the ones backing the cheapest stocks most heavily.
Artemis Capital has the highest exposure, according to FE fundinfo data (which in this case is as at 28 June 2019), with 19.89 per cent of its £279.9m portfolio in stocks listed above. Legal & General and Anglo American are currently top 10 holdings in the portfolio, with 4 per cent in each stock.
In a recent update, manager Philip Wolstencroft commented on his preference for cheaper stocks: “With value stocks – that is stocks trading on below-market valuations – performing well, the fund had a good September. We believe this development barely scratches the surface of the potential future returns. Brexit having dominated the news for the past three years, UK market valuations have not followed global markets higher and, in relative terms, UK equities have become pretty attractive.
“As an example, forward dividend yield for the global market is about 2.7 per cent while in the UK market it is nearer to 4.9 per cent (the figure for our fund is 5.7 per cent). Our fund, meanwhile, has managed to own stocks that have delivered growth in earnings per share and dividends per share about 2 per cent faster than the wider UK market. Faster growth and a higher yield would suggest that the fund ought to do well in the future.”
Source: FE Analytics
The table above shows the 20 IA UK All Companies and IA UK Equity Income funds with the highest exposure to the cheapest stocks on the FTSE 100. Our full portfolio holdings data is not always to the end of the most recent month, so we’ve also noted the effective date for each of the funds.
After Artemis Capital, the fund with the second largest exposure to the low-P/E stocks is Liontrust Macro Equity Income. It has 17.12 per cent of its portfolio in some of the stocks on the list, including top 10 positions in Rio Tinto and Legal & General.
Managed by Stephen Bailey and Jamie Clark, the £94.3m fund’s investment process revolves around the identification and interpretation of major economic, political, social and cultural developments affecting the UK and the rest of the world, before searching for the companies best-placed to benefit from these macro themes.
It currently has a value bias while the managers have been increasing their exposure to the FTSE 100 over recent years. In a recent note, they explained: “Given the increasing, post-global financial crisis divergence between the valuation of cheap and expensive companies, a Brexit-impacted FTSE 100 feels like a gold mine of opportunity for anyone with an interest in value stocks.
“A key expression of value is dividend yield and for Income investors like us, the FTSE 100 is currently packed with a wealth of companies offering eye-catching income opportunities.”
Performance of funds vs index in 2019
Source: FE Analytics
In third place is Dimensional UK Value, which as its name suggests has an explicit focus on value investing. It has 15.31 per cent of its portfolio in some of the FTSE 100 stocks we highlighted earlier, with Anglo American and Aviva being in its top 10.
As a fund house, Dimensional have a differentiated approach to investing in that it applies academic research to practical investing. Essentially, its approach seeks to certain characteristics (known as ‘dimensions’) that tend to be associated with higher expected returns.
Other well-known funds on the above list with a value approach include UBS UK Opportunities, LF Majedie UK Income, Lazard UK Omega, Man GLG UK Income and Premier Optimum Income.