Similarly, value investing is predicated on the idea that markets are, in fact, not intrinsically efficient, as some fund managers liked to believe. Greed and fear is the old mantra, and we have seen enough evidence since 2007 that when the going gets tough, the funds go running. All too readily, what Alan Greenspan called 'irrational exuberance' flips over into an irrational stampede.
In the large cap arena a question of definition arises, and many people assume that the inhabitants of the FTSE-100 index fit the bill. The trouble is that this grouping is dominated by relatively few industry sectors, such as financials, telecoms and pharmaceuticals. The flight to quality in an economic downturn will ensure that their stocks are fully priced, and the index's limited range of membership also limits the capacity to diversify at this level of market capitalisation.
But it is a movable feast, and equities lurking in lower ranks of the All-Share index can rise to the top echelon. We are talking here about companies - still of estimable size - that can claim a secure and growing presence in their marketplace, that have found it possible to maintain their dividend yields, and whose share price trades at a discount either to their net asset value or their earnings potential.
This is value territory, and it is a research-intensive exercise to identify the winners while discarding those companies for which there are good reasons why they are undervalued. Investors will want to know that their fund manager has such resources to draw upon, and takes a hands-on approach through visiting and rigorously assessing the target companies.
We could hardly reach this stage without reference to Fidelity's Special Situations fund, formerly managed by Anthony Bolton, and well known for its history of prodigious returns. According to Financial Express data, it outstripped its peer group over the 10 years to 30 June 2009, with a 159 per cent total return. If it has faltered over the past year - Mr Bolton handed over the reins in January 2008 - its loss of 8 per cent still stacks up against the 20+ per cent nosedive in the FTSE All-Share index, and the fund has more recently returned to its winning ways.
Performance of Fidelity Special Situations fund over 10-yr period (ending 30 June 2009)
Source: Financial Express Analytics
Another noteworthy candidate is the Schroder Recovery fund, a vehicle whose 10-year return of 99 per cent still manages to impress. There is a hint of nimbleness here, in that a 6 per cent set-back over three years has been followed by successive gains over the recent, more troubled periods.
Performance of Schroder Recovery fund over 10-yr period (ending 30 June 2009)
Source: Financial Express Analytics
Finally, investors will know that this is an area that carries a heightened degree of risk, and both the Fidelity and Schroder offerings posted volatility in the 20-22 per cent range over the 3 years to date. But no gain without pain: the least volatile fund in our sample - Jupiter's UK Special Situations - restrains the risk measure to 16 per cent, but barely made a turn on its assets.
This article first appeared in Investment Adviser.