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Our monthly research roundup – overcoming human nature

Our monthly research roundup – overcoming human nature

18 March 2019

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

There are lots of ways to go about investing. In the end we all want the same thing.

To buy investments less than their true worth, in the hope they grow in future.

One method is to try and buy a business on a low valuation and sell it when the valuation, and the share price, rises. In its most basic form, this is known as 'value' investing.

Some of the world's most-admired investors are known as value investors. Warren Buffet’s probably the most famous. But even the best investors think about value in different ways.

This article isn’t personal advice. If you’re not sure an investment is right for you please contact us for advice. Investments rise and fall in value, so you could get back less than you invest.

A modern day value investor

We recently met Ben Whitmore, manager of Jupiter Income and Jupiter Global Value Equity funds, to talk about his views on value. We view him as one of the most successful modern day value investors.

He describes value investing as "the art of buying stocks that trade on low multiples of earnings, cashflow or assets for reasons which are not justified over the medium term".

It sounds a bit complicated at first glance.

In practice, Whitmore looks for companies cast aside by other investors. Maybe because they haven't met a shorter-term target, or they're part of a sector that people just don't like at the moment.

Importantly though, they must have the potential to get through this tough patch and recover. And he must be able to buy them at a share price that's lower than their earnings and cashflows suggest it should be.

He uses the price/earnings (P/E) ratio as a measure of value. It shows how much an investor is willing to pay for a company's earnings. For example, if a company's trading on a P/E of 10, investors are willing to pay £10 for £1 of current earnings.

The higher the P/E, the higher the expectation for future growth. But if the company can't meet these expectations, it's probably overvalued and the share price is too high. A low P/E might show a company's undervalued – if it goes on to grow its earnings ahead of expectations, its share price could rise too.

History shows investing in lowly valued companies can be one of the most successful ways to invest. But this approach is a lot harder than it sounds. Lots of people struggle to get it right.

This is partly because human emotions often get the better of us. We're naturally drawn to companies that have already done well, and overlook those that've seen a setback.

The key is to work out if the business is in permanent decline, or if it's facing a temporary issue. With the latter there's the potential for big gains to be made when things come good again. It's exactly what Whitmore aims to do.

Find out more about Jupiter Income

Find out more about Jupiter Global Value Equity

Focus on the fundamentals

When we met Ben Whitmore he showed us some interesting research. It shows investing at the right valuation is one of the main influences on investment returns.

But a lot of people try to forecast things like economic growth instead, and use this to decide how to invest. Getting forecasts like this right is almost impossible though. Even the IMF (International Monetary Fund) recently admitted how difficult it is. For example, during 1991-2016 the IMF only anticipated 47 out of 313 recessions (across 117 economies).

Even if you're lucky enough to get it right, there's still the question of trying to work out how share prices will react.

Whitmore's research shows economic growth predictions are a poor indicator of future performance. But investing at the right P/E can have one of the biggest impacts.

Be patient

Value investing won't work all the time. We've seen this in recent years. Other styles of investing can be successful too.

The key to value investing is patience. You're more likely to make good returns if you stick to a tried-and-tested process through thick and thin. This is exactly what Whitmore's done. He takes the emotion out of investing, and keeps his eyes squarely on the facts.

He's got a great track record and two of his funds are currently on the Wealth 50. The Jupiter Income Fund focuses on UK companies that pay dividends to shareholders. It currently yields 4.3%, though this is variable and not an indicator of future income. If you don't need the income now you can reinvest the dividends to boost growth potential.

He also runs the Jupiter Global Value Equity Fund with Dermot Murphy, another avid value investor. This fund uses the same process, but it focuses on growth and invests in companies across the globe.

More about Jupiter Income inc. Charges

Jupiter Income Key Investor Information

More about Jupiter Global Value Equity inc. Charges

Jupiter Global Value Equity Key Investor Information

Don't forget – tax year 2019

As we approach the end of the tax year, our research team has come up with some extra ideas for last-minute ISA and SIPP contributions.

As different investment styles come in and out of favour, it makes sense to diversify your portfolio and invest in funds doing something different. That's why we think Ben Whitmore's funds could sit well with others doing something different, perhaps using a growth-based approach. These funds tend to invest in companies that are expected to grow their earnings at a more predictable rate.

Lindsell Train Global Equity fits this bill in our view. You can find out more about the fund in our dedicated tax-year-end page.

Tax year 2019

Lindsell Train Global Equity has a holding in Hargreaves Lansdown PLC.

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Investment notes
No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

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