In search of value

David Prosser discusses a potential growth to value shift and the investment companies that may benefit.


As losing runs go, 13 years is pretty miserable. That is the depressing streak that value stocks in Western stock markets have been on when measured against their growth counterparts. By the end of last year, the valuation gap between value and growth stocks in the UK was at its widest point since the financial crisis of 2008 – and, going back beyond the crisis, since the bubble of 2000.

Whisper it quietly, however, but the tables may finally be turning. There is a growing feeling that 2021 might be the year in which value investing makes a decent comeback.

One argument is that the stocks that have powered growth styles forward in recent times may just be beginning to run out of steam. The technology sector, in particular, now trades at such elevated valuations that even its biggest fans are talking about taking some profits. Consumer stocks with an ecommerce bias continue to perform strongly, but will find it difficult to sustain their accelerated growth as the Covid-19 crisis eases and bricks and mortar retailers reopen.

The more positive story is that the stars are beginning to align for stocks that offer hope for value investors, in sectors such as banking, energy and even transport. Above all, the roll-out of a Covid-19 vaccine offers the prospect of a return to more normal times. In the meantime, the fiscal stimulus provided by governments – including in the US, where the new Biden administration is offering more support – offers a boost. And we are even beginning to see talk of rising inflation and bond yields, which is exactly what value stocks need.

There can be no promises. Vaccine setbacks could yet throw the recovery into reverse. And we have certainly heard predictions of a top to the technology boom before, only to see prices rise even higher. Still, there is now good reason to at least consider a closer look at value strategies.

In which case, the investment companies sector is well-placed to help. For one thing, the sector offers lots of good funds that are managed with a value bias. Last month, Citywire published a list of three dozen investment companies, selected by analysts at JPMorgan Cazenove, with a track record of focusing on cheap and undervalued stocks in their portfolios.

There are too many of these funds to list individually here. But what is striking about the list is the fact it spans so many sectors, offering investors plenty of choice and diversification options. From funds such as Fidelity Special Values, City of London and Merchants in the UK, to global vehicles such as AVI Global and Ruffer, and specialists including Aberforth Smaller Companies, JPMorgan European Income, BlackRock North American Income and Fidelity Asian Values, there is something for everyone.

Interestingly, shares in many of these investment companies currently trade at significant discounts to the value of their underlying assets. This is what you might expect given their out-of-fashion investment style, but it gives those who buy the value story the potential for a double whammy – the opportunity to buy value at value, you might say.

Indeed, more broadly, all investment companies on discounts might be considered fair game for value investors. After all, these are funds currently undervalued by the market for one reason or another – exactly what value investors look for.

Will 2021 be the year that value finally breaks its losing streak? There are certainly no guarantees, but for advisers and investors who think this style is in with a shot, investment companies could be a great way to play out their view.