A decade of investing: finding companies that can stand the test of time
Warren Buffett, one of the most profitable investors of all time, once said: “If you are not willing...
There are certain times during the year when savvy shoppers dust off their elbow pads and try to make the most of the potential bargains that are out there. Whether it is bank holiday offers, Black Friday discounts or the January sales, deals are there to be found.
However, for many fund managers, the hunt for bargains is on every day. These ‘value’ investors pay close attention to a stock’s valuation and do their utmost to buy in at an attractive or ‘cheap’ price – even if this means buying a company that is unloved by other investors.
Why do they do this? Because they believe that buying into a stock when it is cheap provides investors with a better chance of making money over the long term.
However, value investing is not without its challenges. Anyone who is trying to bag an investment bargain will need to build an understanding of why a potential investment looks cheap. It may be out of favour for good reason, perhaps because the management team have made mistakes or it operates in an industry that faces serious challenges. On the other hand, there are instances where investors may have overlooked positive change that is happening at a company level or within a sector.
Much will therefore depend on an investor’s skill in distinguishing between a bargain and a ‘value trap’: a stock that appears to be cheap but fails to recover. Fortunately, a handful of talented value managers in the UK have shown an ability to do just this.
Fund manager Hugh Sergeant aims to identify undervalued companies that are yet to deliver on their potential. He buys into businesses at depressed valuations, where he sees the potential for a strong recovery. Over the past 10 years, his process has paid off; the fund has delivered stellar returns of 377%, which compares to 187% by the average fund in the IA’s UK All Companies sector.* This fund is a good option for anyone who is looking for exposure to deep value stocks.
Ben Whitmore is another true value manager, who focuses on buying strong companies when they are out of favour with other investors. Although value managers have struggled in recent years, his performance has also proved robust. Over the past decade, Elite Rated Jupiter UK Special Situations is up by 227%, which compares to 187% by the average fund in the IA UK All Companies sector.*
Fund managers James Henderson and Laura Foll are contrarian investors who look for undervalued, out-of-favour stocks. After they invest, they are prepared to bide their time and wait for the market to recognise a stock’s hidden value. They target companies which are able to produce surplus cash after costs in order to maintain their dividends and increase them over time. Over the past 10 years, they have delivered a 352% return for shareholders in the Elite Rated investment trust compared with 194% for the average trust in the IT UK Equity Income sector.*
*Source: FE Analytics, total returns in sterling, 20 November 2008 to 20 November 2018