180. Our companies are not the most exciting – but they excite us
JOHCM UK Dynamic fund manager Alex Savvides says although the companies he invests in may not appear...
Some people relish finding a bargain, and what better time than Black Friday? But with consumer group Which? revealing that just one in 20 promotions are cheaper on Black Friday than at other times of the year*, how do you know you are getting a good deal?
The same can be said for value investing. ‘Value’ is the name given to investment styles that favour ‘unloved’ companies whose share prices have fallen. But how do you know if you’ve bagged a bargain or a dud that should have been left on the shelf?
As inboxes around the country become inundated with the latest offers, we take a look at four fund managers who spend every working day looking for cheap stocks they hope will reap rewards, and discusses reasons to invest in value today:
Alastair is one of the best-known value managers within the UK investment industry and he describes his approach as “looking in other people’s dustbins” for good stocks they have discarded. In order for companies to be included within this fund, their share prices must have fallen by at least 50%, and investor sentiment towards them will be very low.
At the heart of Alex’s process is the idea of profiting from the uncertainty that change can bring. Stocks in the portfolio are divided into three types of opportunity: restructuring, recovery or growth. Alex 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.
Ben aims to hold shares in out-of-favour and lowly valued companies. They will typically have prominent franchises and sound balance sheets and will tend to be out-of-favour because they are unfashionable, have suffered a fall in profitability or are involved in industries where there are concerns on future prospects.
Finding undervalued companies that are yet to deliver on their potential is the aim of this fund. 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.
The value style of investing has been out of favour itself for some time now, as investors have been happy to pay up for companies that are growing faster than the economy. So if you need some convincing that value is still a good opportunity, here’s what Simon Adler, co-manager of Schroder Global Recovery told us recently:
“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. I’m a student of history, evidence and data and all three of those components suggest value is the place to be.
“I’m always asked what the catalyst will be to see value rally. But if you go back through history and look at the numerous rallies we’ve seen in value, even with the benefit of hindsight no one has been able to identify a catalyst.
“Brexit or the election might well be the answer, but we don’t really know and it’s risky to assume either will be. Many people identify how cheap the UK is, but few point out that large parts of the UK are banks and miners. 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. If you are not going to buy value now, when the opportunity has never been greater, then when will you?”
*Source: Which?, based on the 83 products on sale on Black Friday 2018, whose prices were tracked six months before and six months after the sales ‘bonanza’.