Where have all the value managers gone?

After 20-odd years in the industry, there’s one observation I consistently make when it comes to investing: if you buy something that’s cheap, you’ve got a better chance of making money over the long term.

However, value investing has been a thankless task for quite some time now. ‘Value’ is the name given to investment styles that favour ‘unloved’ companies, whose share prices have, for various reasons, become cheap relative to the business’s fundamental value. Over the past decade, cheap has just got cheaper and we’ve experienced the longest ever period of ‘value’ underperformance.

Against a backdrop of low economic growth, ultra-low interest rates and plenty of free-flowing cash from central banks, however, it is perhaps not surprising that ‘growth’ styles have had a better run. Growth investing targets high quality stocks that have above average growth and are expected to earn a lot more in the future. Investors are continuing to crowd into what they believe to be safe, structural winners, while more value-oriented parts of the market, such as industrials, energy and materials are being shunned. The result is that growth stocks have become very expensive.

As Juliet, our research director, said recently, it really feels like growth is too stretched now. The rest of the team agree. While we are mindful that, if there is a market-wide sell-off value stocks will still under perform, we are of the mind that investors would benefit from adding to their value allocation if they haven’t already. Ten years into a value ‘bear market’, when it still feels a really ‘uncomfortable’ choice, the contrarian in us can see opportunities ahead.

Current valuations leave little room for error and one or two missteps may cause some speedy de-ratings. And, as interest rates start to rise, bond yields and savings rates will follow. Conservative investors will likely revert to these ‘safer’ options, withdrawing their money from established growth stocks.

However, the other consequence of a tough decade is that there are very few genuine value fund managers left: according to Schroders, just 11% of all global equity funds under management have a value focus.

Luckily, there are a handful that are Elite Rated!

A rare breed: five true value funds

• • • Fidelity Special Values

  Launched in 1994, the trust aims to achieve capital growth by investing primarily in unloved UK companies and waiting for them to come back into favour. The manager has been in place since 2012 and is drawn to unfashionable stocks that are out-of-favour and trade on cheap valuations. He looks for potential positive change that others haven’t yet seen.

• • • Investec UK Special Situations

  This fund has been managed by Alastair Mundy for more than a decade. Alastair has a well-earned reputation as one of the most disciplined and successful contrarians operating in the UK market today. His approach tends to be especially successful during turning points in investor sentiment when investment fashions change.

• • • Man GLG Undervalued Assets

  This fund invests across the market capitalisation scale. The team believes that conventional equity valuation principles often place too much emphasis on forecasted future earnings. The fund uses an extensive screening process to discover companies whose profit streams are undervalued by the market, are cash generative and trading below the replacement cost of their assets.

• • • River & Mercantile UK Equity Long Term Recovery

  This fund invests in recovery stocks, where good businesses are currently experiencing below normal profit levels, which are depressing their valuations. If they have the capability to help themselves out of this predicament, the manager will invest. He also likes to add to his holdings at almost fire-sale prices in volatile times.

• • • Schroder Income

  This is a deep value-driven fund, which has little correlation with other income funds, tending to avoid the big income producers in favour of more niche names. The managers firmly believe in the principles of value investing and that stock markets are inefficient because people make irrational decisions based on emotions and inherent biases. This can cause company share prices to deviate from the underlying company fundamentals, which provides opportunity.