Star manager exits highlight need for "nuanced approach"

Value strategies have now trailed growth investing for a prolonged period of time; a large reason for which is the post-global financial crisis environment of low interest rates and quantitative easing and the rise of big tech.

As a result, investors have been prepared to pay a premium for businesses with very predictable earnings, that is “quality growth stocks”, Jason Hollands, managing director of business development and communications at wealth management firm Tilney, said.

But this does not mean value strategies are permanently redundant.

I would argue that Woodford’s problems were less about “value” and more about him straying from the approach that had mostly served him well over this career at Invesco.--Jason Hollands

A different approach?

Mr Hollands added: “The last time I recall people making that prediction was at the height of the dot com bubble. 

"The disparity in relative valuations is now so extreme, that it would not surprise me if we saw a bit of a style rotation at some point. As an investor, you want to have a blend of strategies within a diversified portfolio.

“Just buying unloved stocks on low price / earnings multiples in the hope they will eventually re-rate holds little appeal and can involve a painfully long wait, because many businesses frankly deserve low valuations because they are poor quality or in sectors with low growth potential or declining margins. 

“More discerning managers with a strong valuation discipline also dovetail this quality criteria or are looking for some catalyst for change, such as new management being installed at a business, a restructuring plan or M&A. 

“In assessing value, P/E is only one measure and does not reflect the significant value represented by intangible assets at many modern business. A more nuanced approach is to assess the intrinsic value of a business, rather than just the trading multiple of the stock price compared to forecast earnings.”

Although Mr Woodford and Mr Barnett were value fund managers - their investment styles were arguably slightly different from other value investors.

“But one of their failings was probably they were too focused on value and not focused on the company fundamentals, that is, what was this business is doing to remain relevant at a time that was challenging in addition to that normal economic cycle,” John Moore, investment manager at Brewin Dolphin added.

“So I would remove the 'death of value' from [the story of their downfall]. It is an execution issue.”

Mr Hollands said he was “less interested” in “star managers”, than seeing managers with clear and well-articulated investment processes. 

He added: “I would argue that Mr Woodford’s problems were less about “value” and more about him straying from the approach that had mostly served him well over this career at Invesco. 

“Investing in zero-yielding illiquid and unquoted biotech stocks is certainly not normal territory for either a value manager nor an income fund.”

Notable fund managers

There is still a case for pragmatic and well executed value sensitive strategies as part of a balanced portfolio.--John Moore

If the value style of investing does return to favour at some point, the likes of George Godber, fund manager at Polar Capital, Henry Dixon, manager of the Man GLG UK Income fund, Fidelity Special Values trust manager Alex Wright, and Ben Whitmore, head of strategy, value equities at Jupiter Asset Management have been put forward as individuals who attract support.

Darius McDermott, managing director of Chelsea Financial Services, added: “Sitting in that category you would [also] have the value team at Schroders who run Schroder Recovery; an out and out value fund. They also run Schroder Income and Schroder Income Maximiser and they have a suite of global funds all based on value as well.

“If you are looking for a slightly less well known name, you might have a look at Richard Penney. He runs the Crux UK Special Situations fund and he definitely has a value style. He likes companies to be growing, but does not like to overpay for them.

"In a portfolio, you would normally try to have some value and growth. We have not given up on value. We do favour growth styles over the next 12-24 months but we still hold some value in some of the managers I have mentioned."

Mr Moore said “There is still a case for pragmatic and well-executed value-sensitive strategies as part of a balanced portfolio.

“Richard Colwell manages the Threadneedle UK Equity Income fund.  This is a valuation sensitive income fund which has managed to avoid the extremes that others mentioned have not.  

“What I believe Richard has done well is blend undervaluation from different opportunities and when self-help stories gain momentum he has stuck with that.

"Examples of success include AstraZeneca and Rentokil, which were bought on undervalued metrics but have developed into well-recognised growth plays.”