JOHCM UK Dynamic and MAN GLG Undervalued Assets are two funds well-poised to take advantage of the current valuation opportunity in market, according to The Adviser Centre’s Gill Hutchison.
Markets experienced a return of volatility at the start of the year as higher-than-anticipated inflation led to concerns over potential interest rate hikes.
Indeed, having previously pumped huge amounts of cash into the financial system, central banks are now beginning to explore monetary and fiscal tightening as the global economy strengthens.
Performance of FTSE All Share YTD
Source: FE Analytics
Yet markets continue to feel the lasting effects of the extraordinary amount of monetary support with equity valuations pushed higher as investors have sought out better returns in the low rate environment.
“Central bankers have been putting so much liquidity in the system that people are looking for new places to invest and that has pushed the long risk curve,” said Hutchison, research director at The Adviser Centre.
"Although now people are starting to recognise it, this has been ignored for a long time. But it's not over yet.”
According to Hutchison, the sharp rise in the value of digital currencies such as Bitcoin shows there is a large amount of money in the system with no place to go. However, the early-February sell-off didn't impact investors' behaviour.
"After that mini-earthquake people haven’t changed, they are still invested in equities," she said.
"The average person probably would have a balanced portfolio so normally, we would expect that if bonds are doing well it is likely that the economic backdrop is not so good and, as a result, economically- exposed equities are underperforming.
"The trouble now is that those with a balanced portfolio are not going to have a balanced outcome and they are probably not prepared to see those negatives returns in their portfolio.”
"You may have to prepare your clients for when they see negative returns on their portfolios", Hutchison warned.
The Adviser Centre research director said conversations with fund managers suggested that investment opportunities were harder to come by. However, she said value investing might provide a greater opportunity for returns in the current market environment.
"If you are a deep value or recovery investor you can see some kind of opportunity but if you are a quality growth manager is more difficult to buy into those situations because they are challenged," she explained.
Hutchison said while growth has been the more favoured style in past years, value has started to show some signs of outperformance.
Performance of value vs growth over 1yr
Source: FE Analytics
As the above chart shows, the MSCI United Kingdom Value index has risen by 1.38 per cent over the past year while the MSCI United Kingdom Growth index is down by 3.49 per cent.
But, whilst a strongly value-oriented fund may underperform under the current backdrop, Hutchison said there are "pragmatic options" that can take advantage of the current valuation opportunities in markets.
As such, JOHCM UK Dynamic and MAN GLG Undervalued Assets are the two funds within the value style that Hutchison believes offer a margin of safety for investors.
"What differentiates these funds from other value funds is that they are more pragmatic. Whilst the others are more long term, MAN GLG Undervalued Assets as well as JOHCM UK Dynamic are more in touch with the market," Hutchison noted.
JOHCM UK Dynamic
JOHCM UK Dynamic is an example of value fund actively managed that has delivered good returns despite the value headwinds, according to Hutchison.
"The fund is a more pragmatic one. It has actually done extremely well over the last years so, if you don't want to take that big value bet, I think it's an interesting one to have in your portfolio."
Developed and launched by FE Alpha Manager Alex Savvides in 2009, the four FE Crown-rated fund is biased small and medium-sized companies, fact that allows it to outpace its competitors in up markets.
One of Savvides key defining characteristics is his preference for well-stablished brands that have a long track record and leadership in the sector, a reason why the fund is included on the FE Invest Approved List.
In the fund’s annual review, Savvides said: “This fund has always built its margin of safety through investing in stocks that exhibit not solely traditional value characteristics but also exhibit idiosyncratic drivers of shareholder value in the form of management change and strategic change.”
Its emphasis on stock selection, has helped JOHCM UK Dynamic perform well in falling markets and lose less than the FTSE All Share index on average.
Indeed, the fund has been top quartile over one, three and five years and has delivered, under Savvides management, a 190.47 per cent gain compared to a 93.88 per cent gain for the IA UK All Companies sector and an 89.56 per cent return for the FTSE All Share index.
JOHCM UK Dynamic has an OCF of 0.81 per cent.
MAN GLG Undervalued Assets
Another example of value fund that has delivered a good performance is the four FE Crown-rated MAN GLG Undervalued Assets and is overseen by FE Alpha Manager Henry Dixon and co-manager Jack Barrat.
“We believe equities are a high-risk asset class but that volatility presents opportunity when understood,” the pair noted. “We believe equity markets are not efficiently priced and often reflect either over pessimism or optimism especially when responding to non-market interventions as they are increasingly having to.”
Performance of fund over 3yrs
Source: FE Analytics
“MAN GLG Undervalued Assets has done extremely well. It is a very interesting case as the fund has been all caps,” said Hutchson. “This is because the manager [Dixon] is very active, he looks at the companies, he doesn’t look at the index."
Although noting that the fund can struggle when the investment style is out of favour, Square Mile highlighted the strategy differentiates itself from its peers making MAN GLG Undervalued Assets a good option to hold as a complement to UK investment strategies.
The fund has comfortably outperformed its sector over one and three years and posted a 58.30 per cent return under Dixon's management, as the above chart shows, compared with a 29.93 per cent for the average IA UK All Companies sector fund and a 27.46 per cent rise for the benchmark FTSE All Share index.