EDITOR'S LETTERMerryn Somerset Webb
When we invest, we all like to think we are getting a good deal on the fund or stock we are buying. If we didn’t, why would we do it? Look at things in simple terms like that and you could say that, while investment managers claim to use one style or another (usually “value” or “growth”), they are pretty much all effectively value investors.
But it is actually a tad more complicated. A real value investor buys something because it is cheap in absolute terms – it trades at less than the value of its physical assets; it is on a price/earnings ratio of less than eight (or so); it has a sustainable dividend yield, several percentage points higher than the market average – that sort of thing. A growth investor buys something that looks like it has value relative to its forecast growth. It isn’t cheap in absolute terms – but it will be in five years if it grows as the buyer thinks it will. See what I mean? Totally different things. Now that’s sorted out, let’s think about which style is best for now.
Life, politics and economics are always fraught with uncertainty. But I don’t think it’s too “out there” to suggest there’s a little extra in the mix just now for markets – particularly given how expensive the biggest of them (the US) is. So I want to be invested in areas that have as little uncertainty in them as possible – where the “margin of safety” is the highest. I want value now, not at some unforecastable future date.
This isn’t a particularly popular view. The analysts at FundExpert note that value funds have had a tough time since 2007 – last year was the first in a long time that many of them made it to the top of the performance charts. At the same time, one value manager sent me a chart this week showing that just 15% of income funds have a “majority bias towards a value investment style”. That I find very odd, given that having a high dividend yield is a “classic sign of a value investment”. The key point is a happy one: the area we want to be in is unloved – so there is plenty of scope for gain.
You’ll be wondering where to look for all this value. It’s actually all over the place. There are a few good value funds (look at the ones from Schroders and note that our own Tim Price runs a fund of value funds). But we also look at Japan, where the market offers not just a good dividend yield but also a rising one. In our roundtable, we look at the some of the UK-focused stocks that have sold off in the rush to buy exporters on the back of weak pound. Try Sports Direct, says Fleet Street Letter editor Charlie Morris.
Bob Catto suggests some very cheap small caps, including a tiny company that could be producing the “Holy Grail of renewables” (a cheap, efficient battery). Finally, James Harries brings us back to one of our long-term favourite value investments – German residential property – with the suggestion of Vonovia, a fund that brings with it a “call option on European politics”. Anyone who tells you there is nothing cheap to buy out there is clearly just looking in the wrong place.