Value strategies have been out of favour for much of the past decade as the growth style has continued to outperform. But the recent rally in value stocks might suggest that dominance is coming to an end.
Over the past three months the MSCI UK Value index has made a 7.93 per cent total return compared with a 0.88 per cent gain for the MSCI UK Growth.
Performance of investment styles over 3mths
Source: FE Analytics
Simon Adler, co-manager of the Schroder Global Recovery fund said there are a number of reasons that investors should consider value stocks for the long term.
“One obvious reason to have faith in value is that if you strip away the short-term news, the long-term evidence clearly identifies value has outperformed historically and that buying shares when they’re cheap delivers better returns,” he explained.
“Many people identify how cheap the UK is, but few point out that large parts of the UK are banks and miners,” Adler said. “Miners are cheap across the world and banks are cheap across Europe. Is the UK cheap because of Brexit and Corbyn? Or is it because the big parts of the UK market are cheap from a global basis? I’m not sure I can answer that, and I’m not sure anyone can.
“So instead I’ll point you to another good reason to consider value today: the opportunity now is genuinely unprecedented, the dispersion in valuations is huge."
The fund manager added: “If you are not going to buy value now, when the opportunity has never been greater, then when will you?”
Below, FundCalibre’s Ryan Lightfoot-Brown highlights four funds that could give UK investors exposure to the style.
Investec UK Special Situations
First up is the £1bn Investec UK Special Situations fund overseen by veteran fund manager Alastair Mundy.
“Alastair is one of the best-known value managers within the UK investment and he describes his approach as ‘looking in other people’s dustbins’ for good stocks they have discarded,” said Lightfoot-Brown.
“In order for companies to be included within this fund, their share prices must have fallen by at least 50 per cent, and investor sentiment towards them will be very low.”
Performance of fund vs sector & benchmark over the past 3yrs
Source: FE Analytics
Over the past three years the fund has made a total return of 21.77 per cent compared with a 23.76 per cent gain for the FTSE All Share benchmark and a 23.4 per cent return for the average IA UK All Companies peer.
Analysts at Square Mile Investment Consulting & Research noted that – due to Mundy’s contrarian philosophy – investors should expect some periods of underperformance compared to the benchmark especially over the “medium time frames”.
Investec UK Special Situations has an ongoing charges figure (OCF) of 0.82 per cent and a yield of 2.16 per cent.
JOHCM UK Dynamic
Next on the list is the five FE fundinfo Crown-rated, £1.7bn JOHCM UK Dynamic fund manager by Alex Savvides.
Savvides’ process is focused on identifying stocks where the market has misunderstood corporate change drivers that present opportunities for the “patient, disciplined, and unemotional investor”.
This scope of opportunity is divided further into three types of opportunities according to FundCalibre’s Lightfoot-Brown: restructuring, recovery or growth.
“At the heart of Alex’s process is the idea of profiting from the uncertainty that change can bring,” the analyst explained. “Savvides will look to buy into stocks after the share price has been hit, and then wait for the business to normalise as the new strategic approach takes effect,” he explained.
JOHCM UK Dynamic has made a return of 26.73 per cent over the past three years. It has an OCF of 0.79 per cent and it has a yield of 3.89 per cent.
Jupiter UK Special Situations
The third fund on the list is Ben Whitmore’s £2.1bn Jupiter UK Special Situations fund.
Whitmore will typically invest in companies with prominent franchises and sound balance sheets that have fallen out of favour because they are unfashionable, have suffered a fall in profitability or there are concerns surrounding future prospects.
Writing recently, the manager noted that while growth had outperformed value for much of the past decade there were signs that could change, particularly given the recent spell of value outperformance.
“Although it is premature to declare a change of market regime in favour of value, what we did take away from the episode was this: much of the market is pointing the other way at the moment,” he said. “With a preference for growth at almost any price, many investors risk getting caught out.
“We would not be so bold as to predict a timescale for value’s return to favour but we continue to take comfort from the fact that history shows that over the very long term holding a portfolio of lowly valued securities can deliver above average returns.”
Fund performance compared to the sector and index over the past 3yrs
Source: FE Analytics
Jupiter UK Special Situations made returns of 17.89 per cent over the past three years, less than the FTSE All Share which made 24.23 per cent. It has a yield of 3.70 per cent and an OCF of 0.76 per cent.
ES R&M UK Recovery
Finally, Lightfoot-Brown highlighted the £271.5m, four Crown-rated ES R&M UK Recovery fund overseen by Hugh Sergeant.
“Finding undervalued companies that are yet to deliver on their potential is the aim of this fund,” said the FundCalibre analyst.
“The manager uses his three decades of investing experience to identify companies where he believes management have the capability to turn things around.
“He will also add to his holdings at almost fire-sale prices in volatile times, which further increases the possibility of long-term capital appreciation.”
Fund performance compared to the sector and index over the past 3yrs
Source: FE Analytics
The fund has made returns of 25.28 per cent over the past three years, outperforming the MSCI United Kingdom benchmark, which made 23.21 per cent. The fund has a yield of 2.43 per cent and an ongoing charges figure (OCF) of 1.10 per cent.