Do investors need to consider value funds?

With more than 3,000 funds to choose from in the UK, investors have to make a number of key decisions to narrow the field and make appropriate investment choices.

Asset class, geography and risk tolerance are three prime examples of these choices but so is the style of investment they choose to follow - with the decision between ‘value’ and ‘growth’ having sparked intense debate for years.

The past decade - since the global financial crisis - has been dominated by growth funds, with value funds only outperforming in two shorts spurts in that time, the last of which was a six-month period in 2016.

Growth & value explained

For a bit context, growth companies are expected to grow faster than their peers and will typically reinvest earnings in order to expand, in the form of new workers, equipment, and acquisitions. However, they are now more expensive thanks to the strong outperformance we have seen, leading to investors expecting big things. If these expectations do not materialise, the price can fall fast.

By contrast, value funds are all about finding diamonds in the rough, as they are essentially investing in companies whose stock price does not represent their fundamental worth for one reason or another. Value investors seek businesses trading at a share price that's considered a 'bargain' in the hope that, as time goes on, the market will become aware of this and the price will start to rise.

The slowing global economy, with persistently low interest rates coupled with disruptors in the technology industry, such as Amazon, have curtailed the influence of value investing. As a result, these companies are priced at significantly low levels when compared to growth stocks.

Spotting a catalyst for a reversal in fortunes for value investing is very hard to do and can normally not be seen until 3-4 months after it has begun, meaning many investors lose out on the early gains. It is for this reason that we have moved to 'style neutral' in the VT Chelsea Managed funds. While we have not divested from the growth funds that have been doing well, we have been allocating more new money to value-style funds to make sure we are not over or under-exposed to either.

For investors who may want or need to rebalance their own portfolios, here are four value funds to consider:

Schroder Global Recovery

Launched in October 2015, this global value fund is managed by Schroders’ well-known value investment team. Nick Kirrage and Kevin Murphy have been joined by Andrew Lyddon to run this concentrated, unconstrained portfolio. The fund is heavily invested in financials (29.5%*) with bank Standard Chartered (5.7%*) its largest individual holding. The fund has returned 42%** in the past three years.

Jupiter UK Special Situations

This is a core UK value fund with manager Ben Whitmore differing from his peers by refusing to forecast a companies’ future profits, as he believes all longer-term analyst forecasts are often wrong by a wide margin. Ben can typically hold up to 75 stocks and as few as 35, depending on market conditions. The process of realising value with contrarian ideas often takes time and so the average holding period for a stock is likely to be several years. The fund has returned 25%** over three years and 209.1%** over the past decade.

R&M UK Recovery

Veteran fund manager Hugh Sergeant holds approximately 200 of these out-of-favour stocks in his portfolio. The team believes it is essential to meet company management before investing and will use their bespoke philosophy and process called ‘PVT’: potential, value and timing, to make their investment choice. HSBC (3.6%)*, BP (3.4%*) and Royal Dutch Shell (3%*) are the three largest holdings in the fund, which has returned 37.9%** in the past three years and 270.8%** over ten years.

Investec UK Special Situations

Investec UK Special Situations fund is another alternative. The 46-stock portfolio has GlaxoSmithKline, Capita and Travis Perkins as its top three holdings**. The portfolio has been run by renowned contrarian investor Alastair Mundy since 2002. Alistair looks for shares whose prices have fallen substantially from their peak. He says: “I describe it as looking in other people’s dustbins for ideas – every now and then we will find something of value that has been discarded.” The fund has returned 23.7%** in the past three years and 152.8%** over the past decade.

*Source: Fund factsheet, 31 May 2019

**FE Analytics, total returns in sterling to 15 July 2019

***Source: Fund factsheet, 30 June 2019

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius's views are his own and do not constitute financial advice.