Mix and match to profit from recovery for value funds and trusts

Riding the resurgence of value as an investment style without throwing caution to the wind means holding both value and growth funds.

There have been several false predictions that the next surge of stock market returns will be powered by value stocks – companies that have come crashing down and are trading below their intrinsic value. Equally, there have been numerous erroneous forecasts that the momentum behind growth funds is turning to swash.

While the powerful wave of returns from growth stocks appears to have broken recently amid a sell-off in high-riding technology companies, it is far from given that the tide will finally turn for value investing.

A more prudent approach than attempting to surf a single investment style is to have exposure to both. We asked investment experts for the value/growth pairs they use to capture an upsurge in either and avoid a breaker or ripple effect from backing the wrong roller.

• Even if the rotation has legs, stick to this golden rule of investing
• Is this the start of a style rotation or another false dawn?
• Are value ETFs about to receive a momentum boost?

Murray International and Scottish Mortgage

Tyndall Investment Management suggests blending two global investment trusts – value-focused income proposition Murray International (LSE:MYI) and pro-growth Goliath Scottish Mortgage (LSE:SMT), both constituents of interactive investor’s Super 60.

James Sullivan, head of partnerships at Tyndall, pointed to the recent ‘tremendous’ performance of Scottish Mortgage, despite a more testing period this year. Murray International has been comparatively ‘underwhelming’, although a near 5% yield has gone some way to compensate.

“Betting the family silver on a binary outcome of the growth versus value trade at this junction could result in a feast or famine,” says Sullivan.

“What we like about this pairing is that it covers a multitude of outcomes. The quality growth, technology trade – reflected in Scottish Mortgage owning Tesla Inc (NASDAQ:TSLA), Amazon (NASDAQ:AMZN) and Tencent (SEHK:700) – is not going away, albeit some heat could justifiably come out of valuations in the short term.

“Meanwhile, inflationary pressure is likely to perpetuate a prolonged re-rating of some very unloved value stocks, which should play into the hands of Murray International nicely.”

It was announced at the end of last week that James Anderson will retire from fund management next year and step down from the trust on 30 April 2022. Tom Slater, joint manager of the trust since 2015, will become lead manger from April 2022. Lawrence Burns, who has co-managed the Baillie GiffordInternational Concentrated Growth Strategy since 2017, will become deputy fund manager with immediate effect. 

Allianz UK Opportunities and Jupiter UK Mid Cap

Kingswood, the wealth manager, has used two small and medium UK companies funds in its core portfolios since 2018 – one focusing on value in the form of Allianz UK Opportunities run by Matthew Tillet and the other on growth in the shape of Jupiter UK Mid Cap (formerly Merian) managed by Richard Watts.

“They complement each other with almost no stock overlap,” says David Winckler, Kingswood’s associate director of investment strategy.

“The Allianz fund is more contrarian and focused on containing downside risks, while the Jupiter fund has exposure to stocks with great long-term growth prospects. It will come as no surprise that their risk/return profiles have been very different, especially during recent years, with favourable market conditions mostly for growth assets until the more recent value rally.

• Pensionstories: the saving habits and goals of an investor in their 30s
• Pensionstories: the saving habits and goals of an investor in their 40s
• Pensionstories: the saving habits and goals of an investor in their 50s

“Nonetheless, both have significantly outperformed the FTSE All-Share and the FTSE 250 over the last three years and we think our UK exposure overall is well positioned to profit whatever style is in vogue from here.”

Fidelity Special Values and Edinburgh Worldwide

For Numis Securities, the investment trust analyst, two investment trusts from different sectors – UK equities trust Fidelity Special Values (LSE:FSV) and global trust Edinburgh Worldwide (LSE:EWI) – make an “interesting pair”. They share a focus on small and medium companies.

Although the Fidelity trust has a mandate to invest in shares of all sizes, just 28% of its assets are invested in FTSE 100 stocks compared to 80% of the FTSE All-Share index.

“[Manager] Alex Wright looks for unloved stocks where the downside is limited and there’s a catalyst for change,” says Ewan Lovett-Turner, head of investment companies research at Numis.

Edinburgh Worldwide has an explicit focus on smaller companies, investing in less mature companies than stablemates Scottish Mortgage and Monks (LSE:MNKS) but sharing with them Baillie Gifford’s staunch growth philosophy.

“The emphasis on disruptive companies driving innovation has come to the fore during this unprecedented period of lockdown,” says Lovett-Turner. “The recent sharp decline in share prices demonstrates that periods of short-term volatility should be expected but manager Douglas Brodie has an excellent long-term track record.”

Temple Bar and Finsbury Growth & Income

Adam Carruthers, collectives analyst at Charles Stanley, the wealth manager, makes the point that picking between the two styles “isn’t an either/or argument”.

In the UK equity income space, he likes both Temple Bar (LSE:TMPL), run by value investors Nick Purves and Ian Lance of RWC Partners, and Finsbury Growth & Income (LSE:FGT) run by seasoned growth investor Nick Train (pictured below).

• Temple Bar re-enters FTSE 250 index as value style starts to shine
• Interview: Nick Train on share tips and Warren Buffett

Temple Bar’s share price almost halved in the wake of Covid-19 being declared a pandemic and long-time contrarian manager, Alastair Mundy of Ninety One, stepping down from managing the trust for health reasons. It has, however, outperformed the FTSE All-Share by 36% in the six months to 8 March, while Finsbury Growth & Income has underperformed by 12%.

“Nick has not gone down in our estimation at all, but [this] succinctly illustrates the speed and the scale of recent moves,” adds Carruthers. “We – like Purves and Lance – think valuations matter, but we also believe that good growth managers will always make money. The two can co-exist.”

Aberdeen Emerging Markets and JPMorgan Emerging Markets

QuotedData likes Aberdeen Emerging Markets (LSE:AEMC) and JPMorgan Emerging Markets (LSE:JMG) – two of the best-performing investment trusts in the global emerging markets sector, but with quite different approaches.

“The JPMorgan trust invests directly in growing companies with sustainable business models and its asset allocation is driven by stock selection,” says James Carthew, head of investment trust research at QuotedData.

“By contrast, the Aberdeen Standard trust invests via funds with a bias to countries and areas of markets that its managers feel are undervalued and might re-rate. It holds a number of funds managed with a growth style but has a definite bias towards smaller companies and out-of-favour situations.”

• Why investors need to rethink the 60/40 investment rule
• Read more content on investment trusts here
• Check out our award-winning stocks and shares ISA

Another aspect that makes the Aberdeen Standard trust a value proposition is that its managers, Andrew Lister and Bernard Moody, seek to profit from investment trust discounts.

“They set out to make money from their asset allocation decisions as well as fund selection and, where they invest in other closed-end funds, discounts narrowing,” adds Carthew.

Man GLG Japan Core Alpha and Baillie Gifford Japan

Shore Financial Planning has used Man GLG Japan Core Alpha alongside Baillie Gifford Japan (LSE:BGFD) Trust for the past three years.

“I try and have a mix of growth and value in portfolios – not necessarily in every region but it works well in Japan,” says director Ben Yearsley.

“Pairing investments only work if the funds stick to their process and these two Japanese ones have done just that for many years – Man GLG has a deep value contrarian style whereas the Baillie Gifford trust is out-and-out growth.”

• Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)

The four managers named on the Man GLG fund buy cheap companies and wait for them to re-rate. Balance sheet strength and cash flow are important factors.

The two managers of the Baillie Gifford trust aim for broad exposure to Japanese growth. Their fund has more exposure to smaller companies and lower turnover.

“Both are leaders in their fields,” adds Yearsley. “With very little crossover they sit nicely alongside each other.”