THE CONTRARIAN VALUE INVESTING
Value investing
UK indices performance
3 mths 6 mths 1 yr 3 yrs 5 yrs 10 yrs
GIFS Equity UK 6.19 9.87 50.84 -1.94 6 2.42
GIFS Eq UK Income 5.34 8.92 46.51 -2.75 5.33 4.6
FTSE 100 5.99 12.51 50.42 0.43 6.88 1.97
FTSE All-Share 6.42 12.24 52.3 -0.23 7.16 2.64
MSCI World
Source: Morningstar
9.38 12.32 40.88 0.83 5.37 -1.24
UK Equity Inc vs All Companies – 3 years
10
0
-10
%
-20
-30
UK Equity Income
FTSE All-Share
-40
Apr ’07 Oct Apr ’08 Oct
Source: Financial Express Analytics
UK All Companies Compani panies
Apr ’09
Oct
Apr ’10
UK Equity Inc vs All Companies – 10 years
80
60
40
% 20
0
-20
UK Equity Income
FTSE All-Share
-40
UK All Companies Companie
’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10
1 Apr ’00 – 1 Apr ’10. Source: Financial Express Analytics
Learning to love
value once more
Value managers have been unloved for some time
but could a return to markets driven by fundamentals
see the approach come back into favour?
BY NEAL UNDERWOOD
In momentum-driven markets,
value investors can
often underperform. A
return to markets driven by
fundamentals could herald
the return of the value
manager, but equally it can
be argued that value investing
should never really go
out of fashion as long as
one understands the nature
of it and adopts an appropriate
time horizon.
One who is firmly in the
latter camp is Carl Stick,
manager of the Rathbone
Income Fund. He argues
that there is not necessarily
a good or a bad time to be
a value manager.
He says: “Why would
anybody judge it to be
a good or a bad time?
Will a value strategy underperform?
Yes, there will
be times when it does.
The big thing with value
investing is whether it is
done properly. You could
argue everybody is a value
investor – everybody buys
something on the basis it
will go up.”
l Spot the opportunity
One definition of value
investing is seeing an
opportunity in an asset or
share where the price the
market is offering the asset
at now does not reflect
the true intrinsic value of
that asset.
“We are happy to buy
that asset now on the
understanding that the
true value will be realised,”
says Stick. “What we
would not be saying is that
in six months’ time the
market will not be even
more askew.
“The price we are
paying gives us a margin
of safety that the valuation
will be realised but
we do not know when.
We are less worried about
how we perform versus
the benchmark.”
l Hard to pinpoint
It can be problematic, however,
to be definitive about
exactly what value investing
is. Nick Train, founder
and director of Lindsell
Train, says a proxy for
value investing, although
not its identity, is high-dividend
yield.
He explains: “It is certainly
interesting to me
that strategies that focus
on achieving a higher level
of dividend definitely have
a cycle for when that is in
favour and either working
or not working.
“Income-oriented investment
strategies have had
a very tough few years.
The period through 2007
into mid-to-late 2009 was
very hostile for income
seeking strategies. Lots of
income managers relied
on banks and financials,
which got absolutely crucified
in the collapse.”
The mining sector, by
contrast, tends not to have
a high-dividend yield, so
a large number of income
funds were simply not
exposed to that theme
and missed out on some
big gains.
l Price-to-book
However, value investing
does not only encompass
income-seeking funds.
Train says he has no idea,
for example, whether low
price-to-book stocks have
done badly.
“I suspect last year they
would have done really
well; there was a rally in
beaten up cyclical stocks
so it was a classic year
for deep value investing,”
he adds.
Train describes himself
as a value investor, but for
46 PORTFOLIO ADVISER [www.portfolio-adviser.com] MAY 2010
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