Securing value
Sometimes it is difficult to see the wood for the trees. Investment is no different. Periods come and go when a theme sweeps all before it and resistance is futile, yet it masks truisms which have tended to stand the test of time. Reversion to mean, effective diversification and value investing are such examples. Sir John Templeton was right to warn “The four most dangerous words in investing are: ‘This time it’s different’.” Believing that established investment principles and investor psychology have changed permanently can cost investors dear. The current focus on the large US technology stocks and growth generally is an example, yet an ill wind blows, and value investing looks set to once again hold sway.
A changing world?
As oft suggested in these monthly columns, humility is an essential element of sound investment. Hubris can often lead to an investor’s nemesis. Questioning one’s assumptions, being willing to accept and learn from error and then move on, and a reverence to long-term cycles and principles are part and parcel of good portfolio management. No matter how good a company is, valuations still matter. Buying stocks when historically expensive downplays the fact that valuations when bought are a key determinant of future returns – particularly over the long-term. For markets chime to the rhythm of long valuation cycles, over which ‘value’ has tended to prevail.
Value can mean different things to investors. The UK, Europe and emerging markets look better value than the US, which is historically expensive. Within their underweighting of equities relative to benchmark, the portfolios are positioned accordingly. They also tend to be overweight value stocks. These are stocks which trade at a discount to their estimated value perhaps because investors favour other themes and sectors and/or have overreacted to some stock-specific bad news. It is important to focus on good companies where sentiment trails the fundamentals, rather than ‘value-traps’ – particularly given the rise in number of ‘zombie’ companies. Identifying a catalyst for a rerating is also important.
And history is on our side – for value has outpaced growth. Recent research suggests that over the last 100 years, value stocks in the US have returned on average 2.5% more a year than growth stocks. It is a similar story in other markets. What has tempted some investors to forget this truism has been the Alice in Wonderland world of Quantitative Easing (QE) and artificially low interest rates, courtesy of the financial crisis of 2008 – as frequently frowned upon in these columns. This has favoured fast growing growth stocks which promise potential – think the large US technology stocks – because lower discount rates increase the value of future cash flows given the value of money decreases with time.
It is therefore no surprise growth stocks have since done well. Our portfolios have benefitted from their growth bias, where remits allow. However, in recent years their equity balance has gradually shifted in favour of value. Just as reality prevailed, and value regained its Crown after the internet and dotcom bubble of the 1990s, I suggest value is again about to emerge from the shadows. If inflation does continue to be stickier and more volatile in the years ahead, regardless of sluggish economic growth, then growth stocks will face a strong headwind which perhaps will be first and most felt by the US technology stocks.
This is at a time when the extent of profitability resulting from their massive investment into Artificial Intelligence (AI) will come to be increasingly questioned. Investors’ patience and enthusiasm will wilt. This is before we start factoring in a growing statism within the US administration which at the very least adds to unpredictability. The level of market concentration as represented by the top US stocks also bodes ill if history has a word. It is interesting to note that in recent years US corporate earnings outside the top technology stocks have been flatlining – a sluggish economy will not come to the rescue, while higher than expected inflation will continue to ebb away at confidence.
In such a scenario, the more reliable near-term cashflows, cheaper ratings and often higher yields of value stocks will become more attractive. Recent figures from Morningstar suggest straws in the wind so far this year, with value stocks having modestly outperformed growth stocks for the first time since 2022 when there was the first flicker of hope. Certainly, at a market level, fund inflows suggest Europe, including the UK, are favoured – and their better performance would appear to substantiate this. Emerging markets represent the giant waiting to stir. Within their equity components, the portfolios are positioned accordingly at both a stock and market level.
Equity positioning
This gradual repositioning in recent years towards value has involved increasing exposure to companies which focus on sound stocks which are unfairly undervalued while offering a catalyst, and income stocks which tend to be more value orientated given the higher short-term cashflows – it being no coincidence portfolio yields are higher relative to their benchmarks. Below is a selection of companies which have been added to, and which are well represented across our portfolios, while ensuring portfolio balance.
Temple Bar Investment Trust (TMPL) focuses primarily on UK securities to provide income and capital growth, its benchmark again being the FTSE All-Share Index. Since RWC Asset Management took over in 2020, performance relative to its benchmark has been impressive – recent five-year figures suggesting the portfolio’s NAV has grown 150% compared to 80% for the FTSE All-Share index. The experienced duo of Ian Lance and Nick Purves are not shy in taking contrarian positions if it is felt value will triumph. The focus is very much on fundamentally sound businesses, with strong balance sheets and low gearing, whose rating is suffering from unduly poor sentiment, and where a catalyst may be in the wings.
This policy and acumen have rewarded shareholders well. Meanwhile, the management’s optimistic outlook as to the many opportunities available is in part reflected in the recent robust increase in the company’s dividend, a consequence of its stock focus, which now equates to a yield of 4.3% at time of writing. This, together with the portfolio’s meaningful valuation discount relative to the market and the team’s superb track record, helps to account for the shares now trading at close to par – which is thoroughly deserved. We expect patient shareholders will continue to be rewarded.
Fidelity Special Values (FSV) seeks outperformance of the FTSE All-Share index via businesses which similarly stand on a material discount to the UK market, and which possess attractive growth potential together with low levels of debt. The search for value helps explain why earnings proved resilient in 2020. Alex Wright, the manager, believes the portfolio is well positioned with meaningful exposure to financials, energy and industrials. He invests across the market cap spectrum but remains overweight smaller companies given valuations and outlook. The company has performed well – its net asset value (NAV) has handsomely beaten the benchmark over both the short and long-term.
Murray International Trust (MYI) seeks income from an international portfolio of mostly blue-chip value-orientated equities, while also looking to grow capital and dividends in excess of inflation. The portfolio’s composition has a one-third split between North America, Europe including the UK, and the Asia Pacific and Latin America – which fits well with our view as to the relative merits of the markets involved vis-a-vis benchmark weightings. Asia in particular assists with the company’s income remit, with the company dividend equating to a yield of c.4%. Recently announced interim results to 30 June 2025 show a NAV total return of 6% against 1% for the FTSE All-World index.
The managers commented in their latest set of results: “It is pleasing to see the portfolio exhibit robustness during the bouts of volatility that we have experienced this year. This is no more than we would expect from a portfolio of this style. It is also pleasing to see the portfolio keep pace with the rebound that we have seen since the lows of April 7th to the half-year point. Regardless of the prevailing market environment, delivering a globally diversified portfolio, with a focus on quality and income, will remain our primary focus.” Given the income remit, the Board changed the benchmark to the MSCI ACWI High Dividend Yield index with effect from 1 July 2025.
Disclaimer: The information contained in this article does not constitute investment advice or a personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.
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