Valuations became a less useful metric for value investors last year, according to Jupiter manager Ben Whitmore (pictured), as growth stocks returned to favour. 
The manager of the five FE Crown-rated Jupiter UK Special Situations said while 2016 was a strong year for value investing, it was once again overhauled by the growth style.
He said: “Last year all the returns fell to those companies that were already very highly priced. The most expensive shares got even more expensive. It was a very tricky, hostile environment.”
With investors preferring to pay a premium for more dependable stocks rather than backing those unloved by the markets, Whitmore admitted that the fund struggled to keep up.
“2017 in contrast to 2016 was a harder period for the fund. Because of the value headwind, it struggled to keep up,” the manager explained. “It was very difficult, even to someone like myself.”
Last year, the fund delivered a total return of just 9.21 per cent, compared with a gain of 13.99 per cent for the average IA UK All Companies sector fund and 13.1 per cent for the benchmark FTSE All Share index, as the below chart shows.
Performance of fund vs sector & benchmark
Source: FE Analytics
Despite underperforming last year and a challenging three-year period for value investing, Whitmore said the strategy had proved its worth over longer-term.
“Over three years we’ve just had one good year but, over a longer period, our returns have been much stronger than the index and the sector,” he said.
Indeed, over 10 years the fund has comfortably outperformed its peers with a total return of 169.53 per cent.
“For the majority of the last 90-plus years value has outperformed growth,” said Whitmore. “But there have been three very brutal periods for value investors where growth on a relative basis has done much better on a 10-year rolling basis.
“One is the Great Depression of the 1930s in America, the second one is the internet boom and the issues around long-term capital management in Russia in the nineties.
“We are now going through the last period of value underperformance.”
However, the manager said while the style has come under pressure more recently, he believes the current environment is a “compelling opportunity for value investors”.
“It’s been a very difficult period over the last ten years but now that the style has been out of favour and the returns are okay, we can hopefully achieve a portfolio that is pretty lowly valued against stock market averages and where sentiment terms is very out of favour,” he said.
“Those two things are pretty important to try and drive for returns.”
Performance of indices over 10yrs
Source: FE Analytics
As the above chart shows, the growth style has outperformed over 10 years with the MSCI United Kingdom Growth index returning 106.96 per cent compared to an 89.63 per cent gain for the MSCI United Kingdom Value index.
Whitmore added: “You have to take some bad periods to take the longer run returns. Back in 2006 large quality companies were lowly valued, so the starting point was that quality was lowly valued.”
“It is crucial to understand that in 2006 and 2007, value was in higher quality companies such as Reed, Sky, Sage or Unilever. I do think that over time value does work but what is value over time does change.”
Despite the challenges facing value investors broadly, Whitmore said the UK market has proved to be an attractive market for the style.
“Fund managers are very negative about the UK, which has to do with Brexit and the uncertainties around the relations with the EU,” he explained.
“So, we are seeing many UK names to look at, which hasn’t been the case for quite a long while.”
Whitmore noted encouraging data from the Graham & Dodd Price-to-Earnings (P/E) ratio, which measures the price paid for a share relative to the annual net income or profit earned by the firm per share.
“The US Graham & Dodd P/E, that is very high, has now exceeded 1929, which had only been exceeded once before, in 2000,” he said.
“The UK Graham & Dodd PE is quite low in absolute terms but the most encouraging thing is that it’s very low versus stock market averages.”
Source: Jupiter Asset Management
“It looks a lot lower, but our earnings are not nearly as strong as the American earnings so the thing we are most optimistic about is that we can at least get a fund that is extremely lowly valued in an environment where most things around the world are very highly valued,” said Whitmore.
Among some of the names that are looking more attractively valued, Whitmore highlighted retailer M&S and services company Capita, which have been added to the portfolio over the past year.
He said companies providing business services and consumer services – those exposed to either the government or the UK consumer – are also now on their radar.
Looking forward, the Jupiter manager said he will continue looking for low valuations, not just because they guarantee the best returns but to weather further market challenges.
He added: “We are trying to aim for low valuations not only because we think that is the best place to be for returns but because the evidence shows that low valuations protect better in difficult environments.”
Whitmore has managed the £1.9bn Jupiter UK Special Situations fund since 2006 when he joined from Schroders. He also runs the Jupiter Income Trust and co-manages the Jupiter Global Equities fund alongside Dermot Murphy.
Over three years, the fund has returned 35.37 per cent compared to its average peers and FTSE All Share benchmark’s respective returns of 34.60 and 33.99 per cent.
Jupiter UK Special Situations yields 2.10 per cent and has an ongoing charges figure (OCF) of 0.76 per cent.