How the top UK value funds differ

If UK markets have returned to form in recent years, some of the best gains have been captured by portfolios with a contrarian tilt.  

We’ve seen turnaround stories such as Rolls-Royce Holdings (LSE:RR.) (and briefly Marks & Spencer Group (LSE:MKS)) come through, plus classic “value” sectors such as financials posting big gains. 

And investors who want to outsource this bargain hunt are well served for UK value funds. Renowned teams are numerous here, from the Temple Bar Ord (LSE:TMPL) managers Ian Lance and Nick Purves to long-standing Fidelity manager Alex Wright. 

As our first table shows, many UK funds with a value bent have performed strongly in the last one and five years. 

But they have some different quirks which are worth noting if you want to back such a fund. 

The "winners" 

The FTSE 100 has made a total return of around 55% over five years, meaning that most of the names listed in this table have handsomely outperformed the market. 

Those which have lagged behind are still included, purely because they are known for having a value style too. We also include a couple of funds that have a contrarian bent, even if they don't define themselves as out and out value investors.

Of the winners of recent years, many have traits that set them out from the crowd. 

Temple Bar, whose portfolio came under the management of Redwheel back in 2020, has quite a following and regularly appears in our investment trust bestseller lists. 

The fund has several notable traits. The managers have been fans of the banks in recent years – though financials as a broader sector now make up a not too substantial 16.8% of the portfolio.  

Communications sits on a slightly higher weighting, with names like BT Group (LSE:BT.A), ITV (LSE:ITV) and WPP (LSE:WPP) in its top 10 holding list. 

They also have decent exposure to consumer stocks (both staples and discretionary), and to energy. 

The fund is relatively concentrated versus the competition, with roughly 40% of the portfolio invested in the top 10 holdings. 

But it also stands out for having a high allocation to companies listed overseas – something the team does partly for the sake of diversifying by names within a given sector, and also in response to a shrinking UK equity market. The board has mulled the idea of upping the 30% ceiling on the fund’s overseas equity exposure in this context. 

A couple of other traits are also worth remembering. 

Temple Bar now uses an enhanced dividend policy, meaning it can fund its payouts using capital and reserves if needed. But strong performance has driven it to some high valuations, with the shares tending to trade at a small premium to net asset value (NAV) and the dividend yield coming to 3.7%, lower than that of some rivals.

With the trust topping the performance charts and drawing in investors, earlier this year we looked at UK funds you might hold alongside it.

Sector weightings 

Other names here have their own quirks. But the tables included in this piece give a broad sense of how to compare them, beyond just looking at past performance. 

One notable dividing line relates to their sector exposures.  

The table below is ranked by exposure to financials, which sits on a double-digit allocation in every fund included.  

Aurora UK Alpha and Polar Capital UK Value Opportunities are not in the table because they break out their sector exposures differently. 

As mentioned financials have performed very well lately, and the likes of Artemis UK Select, Dimensional UK Value, Law Debenture, Man Income and Fidelity Special Values all have substantial exposure here. 

But some teams are putting a lot of faith elsewhere. 

Consumer discretionary stocks play a big role in the Schroder Recovery, Ninety One UK Special Situations and Premier Miton UK Value Opportunities funds, for example, while a handful have put lots of cash into the industrials space. 

That includes names such as DCC Energy (LSE:DCC) in Fidelity Special Values.

From “factor” funds to Law Debenture 

While something of an odd beast, the so-called factor funds that target a given investment style continue to give stockpickers a run for their money.  

We see that with global funds, but also in the UK market via Dimensional UK Value, which sits in second place in our first table by five-year returns. 

Dimensional looks to capture specific investment styles in a systematic fashion and its UK Value fund has done well to capture the gains in this space, returning around 37% last year alone. But this can cut both ways: 2020, a savage year for UK value shares, saw the fund lose almost 16%. 

As our second table shows the fund has plenty tied up in financials, with top holding HSBC Holdings (LSE:HSBA) accounting for around 9% of the portfolio. Its top holdings sit on some decent allocations, with the biggest 10 positions in the fund accounting for roughly half of assets. As our third table shows that makes it one of the more concentrated funds on this front.  

Having said that Aurora UK Alpha, which does not break it out the total allocation to its top 10 holdings, has more than half its portfolio in top three positions Frasers Group (LSE:FRAS), Barratt Redrow (LSE:BTRW) and Castelnau Group Ord (LSE:CGL).  

Returning to the Dimensional fund, if the top 10 holding list includes a lot of the usual UK blue chips the fund does seem to be going for deeper value than the broad market, by certain measures. 

The fund’s latest price-to-book ratio came to 1.44, notably lower than the 2.37 on the iShares Core FTSE 100 ETF GBP Dist (LSE:ISF). 

Investors will come across other quirks when dealing with such funds. Take Law Debenture, which does some opportunistic contrarian investing.  

The investment team has some flexibility to back companies with no (or a low) yield thanks to the fact that the professional services business owned by the trust generates a good deal of income. In the past that has enabled the trust to hold recovery plays such as Rolls Royce. 

Like Temple Bar, Law Debenture has seen some of its recent success priced in by the market. The trust’s shares trade on a premium of around 1% to NAV, and a dividend yield of 2.9%. 

Lowland Ord (LSE:LWI), which has the same investment team (but no professional services business), trades on an 8.6% discount to NAV. 

The funds in the tables will meanwhile differ by their exposure to companies by size. 

Not all funds disclose their allocations by company size but names from this list that have delved into small and mid-cap shares include Man Income, Fidelity Special Values and Artemis UK Select. 

A final trait worth mentioning is the activism of the Aurora UK Alpha team. 

They successfully campaigned for Barratt Redrow to carry out share buybacks earlier this year, something that came at the expense of the company’s dividend payout.