Temple Bar, Barings Emerging Europe and Miton Global Opportunities are among five investments trust that could benefit should the value style find favour again, according to Kepler Trust Intelligence’s Callum Stokeld.
Growth strategies have benefited considerably from the policy framework put in place by central banks since the global financial crisis as investors have sought better returns on offer from equities in the low-growth environment.
Over the past 10 years, the MSCI World Growth index has made a 266.82 per cent total return compared with a 173.47 per cent gain for the MSCI World Value, as the below chart shows.
Performance of indices over 10yrs
Source: FE Analytics
Stokeld, an investment trust analyst at Kepler, said: “In the post-financial crisis world, value investors have found themselves facing a period of structural underperformance relative to growth investors which has been unusual relative to history.
“In fact, this is the longest period of underperformance since at least the 1920s.”
Despite September’s resurgence of the value style, there is little to suggest that growth style dominance is likely to reverse in the immediate future.
“Indeed, there have been many false dawns of short-term periods of value performance since the financial crisis which have come to nothing,” he said.
Nevertheless, he said all it might take for a style reversion is a catalyst and that could take the form of an interest rate hike signalling, given the impact of the low-rate environment on investor behaviour.
“Central bankers around the world have started to increasingly comment that they may be at or approaching the reversal rate, at which the costs of rate cuts outweighs the benefits,” he explained.
As such, Stokeld has identified five investment trusts that could benefit from any return to value outperformance. To do this, the analyst looked at the r-squared figure – which measures correlation – to value indices.
UK
In the UK, the analyst found that “across all UK investment trusts” the median r-squared figures was higher relative to value indices than growth.
One value investor and trust that sticks out, however, is Investec Asset Management’s Alastair Mundy, manager of Temple Bar investment trust.
“This retains amongst the highest r-squared to the UK value index amongst the various trusts investing in UK equities over both the recent and slightly longer term,” said the analyst.
“Whilst there is one trust with a higher reading, it is notable that the difference is reasonably marginal, and the other trust exhibits a higher r-squared towards the FTSE All Share.
“This likely means some of its apparent value correlation is a result of exposure to large-cap stocks.”
Mundy has overseen the £896.1m Temple Bar investment trust since October 2002, during which time it has made a total return of 470.85 per cent, compared with a gain of 330.45 per cent for the average IT UK Equity Income peer and a 309.58 per cent for the FTSE All Share index.
Performance of trust vs sector & benchmark under Mundy
Source: FE Analytics
It is currently trading at a 3.39 per cent discount to net asset value (NAV), is 10 per cent geared and has an ongoing charge of 0.47 per cent.
The second trust identified by Stokeld is Aberforth Smaller Companies, a “rare, value-focused small-cap trust” that he said has the highest weighting to value stocks in the peer group.
“The management team uses enterprise value-to-EBITDA as their main valuation metric, believing it allows them to better isolate the cash generation of a business and view companies with different capital structures on a level playing field,” he said.
Over the three years to 7 November, the £1.3bn trust has made a total return of 42.86 per cent against a 16.83 per cent rise for the Numis Smaller Companies 1000 Excluding Investing Companies benchmark
“In recent years, the value discipline has led Aberforth Smaller Companies to be tilted more towards UK domestic earnings which have been out of favour after the Brexit vote led to weakness in sterling and doubts about growth in the UK economy,” said the Kepler analyst.
“Political clarity on the next steps in the Brexit vote and diminishing chances of a no-deal exit could therefore also be helping sentiment towards the trust.”
The trust is 1 per cent geared, is trading at a discount to NAV of 7.09 per cent and ongoing charges of 0.79 per cent.
North America
Next up is the Gabelli Value Plus strategy, which Stokeld said has displayed consistently high r-squared figure to US value indices.
“The managers of this trust seek to invest across the market cap spectrum to generate a highly differentiated portfolio to the wider US market,” he explained.
“Valuation is primarily undertaken on an individual stock level, trying to determine if companies are trading at significant discounts to the strategic value they would offer a private investor.”
As such, out-of-favour communications and industrials are overweights while the technology sector – a major driver of US market returns in recent years – is a significant underweight.
Launched in February 2015, the trust has made a return of 30.58 per cent against a 67.75 per cent rise for the average IT North America peer.
The £146.5m trust is not geared, trades at an 11.9 per cent discount to NAV and has ongoing charges of 1.37 per cent.
Emerging markets
Given the wide range of single-country and broad emerging market strategies in the investment trust universe it is difficult to identify value-focused strategies here.
One strategy that does stand out for Stokeld is Baring Emerging Europe, overseen by Matthias Siller, Adnan El-Araby and Maria Szczesna.
Although the £128.1m trust is not a value investor itself, said Stokeld, it generally outperforms wider emerging markets during global value rallies.
The trust invests across emerging European economies, including Russia.
“The managers have noted the depressed valuations in the region and look to take advantage of pricing inefficiencies caused by low broker and analyst coverage of much of the region,” said the Kepler analyst.
Performance of trust vs sector & benchmark over 3yrs
Source: FE Analytics
Over the past three years, the trust has made a total return of 53.49 per cent compared with a 46.84 per cent gain for the MSCI Emerging Market Europe 10/40 benchmark. The trust is 3 per cent geared, has a yield of 4.1 per cent, is trading at a discount of 12.5 per cent and has ongoing charges of 1.5 per cent.
Multi-asset
The last trust identified by Stokeld is Miton Global Opportunities, a £76.8m closed-ended strategy managed by Nick Greenwood, who has overseen the trust since launch in April 2004.
“An alternate way to look to benefit from any value resurgence would be to hold a broad-exposure to assets discounted to their intrinsic value,” the Kepler analyst said.
“The Miton Global Opportunities trust looks to construct a portfolio of just such opportunities, diversifying risks across different themes but buying other investment trusts which offer substantial upside if their intrinsic value becomes more widely appreciated by the market.”
He added: “At present, there are various themes held within the trust where the manager believes there are substantial opportunities for portfolio uplift from narrowing discounts; these include in UK micro-caps, German residential property, and alternative assets.”
Since launch, the trust has made a return of 164 per cent against a 133.2 per cent return from the IT Flexible Investment sector average. Miton Global Opportunities is not geared, is trading at a 3.5 per cent discount and has ongoing charges of 1.45 per cent.