Temple Bar (TMPL ) duo Nick Purves and Ian Lance are confident their portfolio of undervalued stocks will thrive in the current market tumult, which they believe has echoes of the 1970s ‘Nifty Fifty’ crash.

The pair enjoyed a storming start at the helm of the UK equity income investment trust, with Redwheel fund managers delivering nearly 70% shareholder returns in the year after taking over from Ninety One in October 2020, but recent performance has been less impressive.

Year-to-date, the net asset value has ticked up just 0.4% and the shares are up just 2.5% as the war in Ukraine and the commodity crisis took its toll on stock markets.

However, Lance and Purves retain a steely optimism that their £739m portfolio of unloved value stocks will not only see them through troubled markets, but actually benefit investors.

‘We are trying to buy £1 for 50p and the challenge with value investing is you do not know when the market will recognise the value we see in the shares,’ said Purves.

They believe the current situation the market finds itself in has eerie echoes of the 1970s, with inflation soaring due to an energy crisis and popular high-growth stocks taking the brunt of rising interest rates.

In the 1960s, a group of US growth stocks known as the ‘Nifty Fifty’, which included names such as IBM, Xerox, Polaroid and McDonald’s, were considered ‘one-decision stocks that you buy and hold for life’, said Lance.

These highly valued stocks captured investors’ imaginations much like the Faang – Facebook, Amazon, Apple, Netflix and Google-owner Alphabet – stocks did last decade. However, just like the Faangs today, the Nifty Fifty components took a pasting as inflation started to soar amid the energy crisis of 1973.

‘The price of oil went through the roof [in 1973] and a lot of growth stocks were hit,’ said Purves. ‘History doesn’t repeat itself but it does rhyme.’

The conclusion of the 1970s stock market crisis was ‘that value did very, very well and the growth stocks of the Nifty Fifty did badly’, said Lance.

‘What killed the dream was the derating from such high [price-to-earnings ratios],’ he said.

‘They spent the next half-decade derating and the fascinating thing was they went down harder than the market and recovered less in the second half [of the decade] and the returns over the decade were awful.’

He said investors had put too much emphasis on the Nifty Fifty being strong businesses, rather than whether what they were paying for the stock was good value.

‘In 10 years’ time we may look back and think Apple and Microsoft were too expensive,’ said Lance (pictured).

The managers, who also run the £516m Redwheel UK Equity Income fund, say they are not macro expected but that it ‘all comes back to valuation’ and at the moment there is ‘an incredible dislocation in the market’.

Lance noted value stocks had performed well coming out of the 2000 tech bubble, the global financial crisis and the pandemic, and he expects the current crisis with the war in Ukraine to follow the same pattern.

‘Historically, we have done well coming out of those periods. We cannot control the timing but the starting point is a very attractive one,’ he said.

While Lance and Purves await the next leg of the value rally, they are putting up with less than desirable performance.

‘The start of the year was very strong and then the news came out about Ukraine and commodity prices went through the roof and the market immediately decided that it will put economies into recession,’ said Lance.

He added that cyclicals – including their holdings in Marks & Spencer (MKS), Royal Mail (RMG), ITV (ITV) and Kingfisher (KGF) – were ‘hit quite hard’ and fell to levels where they were ‘irrationally priced’.

‘We see this time and again; we go into economic slowdown and the cyclicals are priced as if they will never recover again. There is no ability to look across the valley and think we will come out of this, earnings will improve and the share price will rise.’

Lance said the pair have taken advantage of this by adding to M&S, ITV and Royal Mail.

Mooted income renaissance

One benefit Temple Bar, as well as the duo’s open-ended Redwheel UK Value fund, has is the increasing popularity of the UK stock market as a safe haven in this environment. What is less lauded on the market is the high level of dividends paid by UK companies.

‘The equity income was a really popular sector and investors used to understand the power of dividends and compounding,’ said Lance.

‘But we went through a period where stock markets were going up 20% and did not need dividends because people could sell some stock for capital.’

He said people got out of the habit of relying on dividends and the onset of Covid-19, which forced many businesses to cancel, suspend, or cut their distributions, meant people felt ‘let down’.

With a shift back to the UK, Lance said: ‘Fingers crossed for an income renaissance this year.’