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One man’s trash is another man’s treasure

Emma Wall explains how to profit from going against the herd.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Value investing is the art of finding stocks that the rest of the market has overlooked. Value investors look for a catalyst which will drive a company’s value up, but hasn’t yet been reflected in the share price.

The catalyst might be a new management team or a change in corporate strategy, or it could be that broader negative market sentiment had unfairly driven down a company’s share price – whatever the reason, a value investor seeks out opportunities that other investors haven’t identified.

For this reason, value investors are often called contrarians. Their positions “against” the market can often be painful in the short-term; timing the market is famously hard to do and value investors’ punts on unloved stocks can take time before they pay off.

A value example

Take Tesco for example. The supermarket stock faced the dual headwinds of disruption and scandal a few years ago. In 2014, against a backdrop of challenger retailers Lidl and Aldi fast taking market share, Tesco was hit by an accounting scandal, leading to investigations by the Serious Fraud Office and Financial Conduct Authority.

The share price started the year at 332p, and slid through the year as the challenger firms bit at their heels – then the accounting scandal hit in September and by October 3 the shares were worth just 180p. Ripe for plucking for value investors who believed new chief executive Dave Lewis could right the wrongs, but the stock dipped to just 139p in January 2016, and fell again in June that year before slowly climbing, as the business recovered, to the 219p its worth as I write.

But keen contrarians be warned, sometimes stocks turn out to be lowly valued for a reason – known as value traps, these stocks never see their share price bounce. For this reason it can often pay to trust the professionals, and invest in a value fund, rather than stock select yourself.

Professionals in value

Kate Marshall, Senior Investment Analyst

Value investing’s a tricky style to master. It involves going against the herd and can feel deeply uncomfortable at times, like we’ve seen recently.

To be successful, you’ll need a lot of patience and a keen eye for analysing a company’s reports and accounts. You’ll also need to think carefully about not just when to buy a company, but when you’ll want to sell – it’s quite different to a buy and hold strategy.

A great way to invest with value principles in mind is through an experienced fund manager, and we think Ben Whitmore fits the bill.

After a successful career predominantly investing in the UK, last year Whitmore launched the Jupiter Global Value Equity fund. While it’s still early days on the global front, we think it’s a great option investing in value opportunities around the world. It’s a departure from his previous area of focus, so could perform differently. Past performance is not a guide to the future.

The fund’s focus on value has meant it’s struggled against the benchmark since launch, but we’re positive on the long-term potential. It’s a concentrated fund that can invest in smaller companies and emerging markets, which increases performance potential, but also risk. The fund should sit well alongside growth focussed investments.

Ben Whitmore - Career track record

Past performance is not a guide to the future. Source: HL to 31/07/19, UK track record July 2001 – October 2016 against FTSE All-Share, Global track record November 2016 – July 2019 against FTSE All World.

More about this fund including charges

Key investor information

Fund manager view – Ben Whitmore

Value investing has struggled relative to growth investing during the past five years and 2019 has been particularly difficult.

However, over the long history of stock markets there have been significant premium returns from value investing but given its recent poor performance value investing is (rightly) being questioned.

Read transcript

Emma: Hello I'm Emma Wall and joining me today to talk about value investing is Jupiter's Ben Whitmore. Hi Ben

Ben: Morning

Emma: So what is value investing?

Ben: Value investing is hunting for lowly valued companies where the stock market is not that keen on them for a particular reason. The economy might be bad, or they're just out of fashion, but where you can, if you like, buy a lot of profits in cash for a low amount.

Emma: Value is a type of factor investing and there is seen a significant divergence in factors between growth and value of late. It's something that we've seen in the past, it happened in the late 90s before the dot-com bubble burst, but the drivers of that divergence that dichotomy last time around was significantly different to the drives today weren't they? What has driven value and growth to perform so differently over the recent years?

Ben: Yep so you're absolutely right the value investing has had a very tough period in the last few years. Really the difference between the late nineties and now is that the late 90s was all around optimism about the Internet whereas now my sense is it's all around worries. People are so worried about the world, very worried about disruption to industries, very worried about the prospect of a global recession, that actually it's being driven by worry not optimism. So completely different, but the same divergence between the two styles.

Emma: And in the past whenever there has been a period where value is under performed growth it has then bounced back it's been referred to as an elastic that just gets stretched to a certain point then it pings back to normality. What kind of trigger might there be that will allow value investing to come back to that kind of rolling average?

Ben: Yeah so we've looked at the ten worst periods for value investing in the world over the last hundred years and this is one of the 10 worst periods. And you're right when there's been very very poor periods for value investing in those other nine periods the subsequent five years value as a style has rebounded. Now we don't know whether it be the same this time around of course but the triggers each time have been different. People are still not quite sure over the triggers in the late-1990s - 2000. The triggers in early 1990s and also around the great depression were things getting better. So it tends to be a variety of things but normally it's it just has to be a change from the prevailing sentiment, so this time around for example the prevailing sentiment is around enormous worries about the global economy and enormous worries about negative interest rates. Something around there probably has to change

Emma: Now it has been tough, in particular six months February to August this year, for value investing and investors but presumably as a professional value investor this creates opportunities for you because you are looking for good value and there is value out there?

Ben: Yeah, as ever during a tough period for value investing you're partly thinking about I hope it doesn't get any worse anymore, but you're actually on the other hand you're thinking when you're feeling a bit more optimistic hopefully these are the seeds these investments the seeds of much better returns over the subsequent period because I'm able to buy shares at such low valuations. But as ever with things is when, when you're out of favour you're a tightrope between nervousness and optimism.

Emma: And there is of course that's difficulty with value investing, which you learn to avoid over time, what is a good value stock and what is a value trap. Perhaps you can explain a little bit more about what a value trap is and how to avoid it?

Ben: Yeah so value traps are businesses where they're lowly valued but things carry on going wrong the profits don't recover they fall away or the business needs to make a big acquisition to shore it up and actually your undervaluation is just not there and in in the worst case it's you've actually paid too much for that business. So the areas we look at to try and avoid these are we want businesses where there's a reasonable quality of business. We're not trying to pick up businesses which are poor, low margins, struggling, we don't want to take a chance with a balance sheet, we want to make sure they turn profits into cash. And by doing that you try and eliminate quite a few things you will never I'm afraid eliminate all things that's impossible. You know, the fund manager who thinks I'll get 100 percent right is delusional. But we're trying to sort of eliminate the chances of us having too many problems. A lot of the times people always think about the upside I think our starting point is the downside you know, what are the things that could go wrong, and then just a more sort of common sense thought about the business. Is it likely to be around, you know, 10, 15, 20 years’ time and if you do have like a question mark about that, that's probably something you shouldn't touch. But if, without a shadow of a doubt, you think it's definitely around in 20 years time then probably that's quite a good indicator.

Emma: Ben, thank you very much

Ben: Thank you

This video is not personal advice or a recommendation to invest. If you’re unsure about the suitability of an investment please seek advice. Investments can fall as well as rise in value and you could get back less than you invest. Past performance is not a guide to the future.

Please read the key investor information before investing for more details of the risks and charges. The views in this video are those of Ben Whitmore and may not be shared by Hargreaves Lansdown. Views correct as at 26.09.2019.

Very low or negative interest rates, technological change and a potential global recession are reasons given for the poor relative returns from value investing. For example, who would have predicted the demise of the shopping centre, the change in the combustion engine and a major trade war ten years ago?

Value investing has had to contend with similar factors over the last 100 years and these are not new even if change feels very great now.

Over the last 100 years we have looked at the ten worst periods for value investing relative to growth investing. These periods include the Great Depression in the 1930s, the technology boom at the end of the 1990s and now.

The value spread has widened sharply in 2019

Past performance is not a guide to the future. Source: UBS European Equity Strategy, UBS Quant Group to 30/08/19

The current period is on a par with other periods and in each of the other nine periods value investing has outperformed relative to growth in the subsequent five years. It is by sticking to the process over time that has enabled us to capture this premium return for our investors. However, when the current period will change is of course unpredictable and past performance isn’t a guide to the future.

Annualised performance of value following the worst 5 year periods of value’s performance

Date Prior 5y return value versus growth Subsequent 5y return value versus growth
Feb 1932 -12.0% 13.9%
Apr 1939 -10.0% 13.7%
Feb 2012 -9.3% 2.8%
Mar 1935 -8.7% 1.3%
Jun 2000 -7.8% 16.1%
Jun 2019 -7.1% n/a
Dec 1991 -6.1% 7.4%
Mar 1942 -4.6% 15.0%
Dec 1957 -1.7% 6.5%
Jul 1973 -0.9% 17.9%

Past performance is not a guide to the future. Source: Jupiter Asset Management, August 2019

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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