Interactive Investor

Proof that value investing pays off

24th March 2022 12:13

Kyle Caldwell from interactive investor

Jupiter UK Special Situations, managed by Ben Whitmore, has outperformed the average UK fund over the past decade, despite value investing being out of favour. Whitmore explains how the fund has managed to do this, and names a recovery stock he has sold and another he's continuing to back.

The fund is a member of interactive investor’s Super 60 list.

Kyle Caldwell, collectives editor at interactive investor: Hello. Today I'm speaking to Ben Whitmore, fund manager of the Jupiter UK Special Situations fund. Ben is a contrarian investor who invests in UK-listed value shares. The UK market has performed well over the past year, but remains unloved by investors. What do you think the catalyst will be for investors to return to the UK market?

Ben Whitmore, fund manager of Jupiter UK Special Situations: Well, that's a very good question. There have been outflows, I think, from the UK market for the last five, six, seven years. To be honest, I'm not sure the reasons given for the money flowing out have been things like Brexit, things like better returns from global. I'm not sure what will cause it. It will probably be a surprise, maybe.

Kyle Caldwell: We've seen a lot of overseas companies making bids for UK companies, so it seems that overseas companies are seeing value in the UK, whereas investors are potentially not? 

Ben Whitmore: It's certainly fair to say that companies in America are more highly valued than companies in the UK, and so they are able to use their currency in terms of their higher share price and valuation to bid for companies. You've also got private equity. So I think that might be the case, but I think the other issue with the UK is, we haven't got a huge swathe of very fast growing globally dominant companies. Our largest companies are pharmaceuticals, oil, mining, and so that is also another issue that the makeup of our index is clearly very different to the Nasdaq or the Dow Jones or the S&P 500, where they have those, you know, globally dominant tech companies.

Kyle Caldwell: Value investing has been out of favour as an investment style for over a decade. Jupiter UK Special Situations has however, though, managed to outperform the average fund in the Investment Association's UK All Companies sector. Does this show that value investing can still do well over time, even when it's out of favour as an investment style?

Ben Whitmore: You know, I think it is definitely harder when it's out of favour as an investment style. But there are still periods where you can capitalise on a value recovery. Those would be periods like 2016, 2018, 2021, so there are periods. The key is you can't lose it when the style goes away from you. It's definitely been a headwind, but I think over time, as long as you stick to the discipline, you will eventually, the empirical evidence says, that low valuation is the primary determinant of future investment returns. At some point, if you're patient enough, it will pay off, we believe.

Kyle Caldwell: Since the start of 2022, the market has been rotating towards value shares, which tend to be more economically sensitive and potentially benefit from higher interest rates. Do you expect this trend to continue throughout the year?

Ben Whitmore: We don't know. There was a rotation into value at the start of 2021, but that subsided and went away in the second half of 2021. As you say, there's been a bit of a rotation in favour of value at the start of 2022. We don't know how long that will last for. But, you know, we still see the evidence that the valuation dispersion i.e. the gap between the most highly valued shares and the most lowly valued shares is very, very wide in history, so we still think there's a really good opportunity, we just don't know the timing of it.

Kyle Caldwell: Value investing requires a lot of patience. What's your average holding period for a stock? And could you name a couple of examples of companies that you've held for several years?

Ben Whitmore: The average holding period, what we try and think of when we're making an investment is try and take a three-to-five-year view. Now, some of that value might be realised more quickly, some might be more protracted. So, for example, we bought a stake in Airbus (EURONEXT:AIR), the world-leading aircraft manufacturer, in May 2020. Now those shares have recovered very, very sharply already and no longer offer such value and we've sold them. On the other hand, we've got a stake in GlaxoSmithKline (LSE:GSK), which has performed poorly, it's one of the most lowly valued global pharmaceutical firms, and that is taking longer to recover.

Kyle Caldwell: And if a company's share price doesn't perform as you expect or hope, how do you decide whether to continue holding or cut your losses?

Ben Whitmore: I think it depends on whether, if the fundamentals are improving, but the stock market's not rewarding it, then clearly that's absolutely fine. The harder ones are when your view on the company appears to be wrong and the fundamentals are not improving and maybe they're worsening. And then you need to reassess the situation looking forward. And either for us, we want to add some more money, some more investments, or we want to acknowledge we've made a mistake and reduce the position.

Kyle Caldwell: And finally, a question we ask all fund managers, do you personally invest in the Jupiter UK Special Situations fund?

Ben Whitmore: Yes, all of the funds which I manage, I put my stock market savings into.

Kyle Caldwell: Ben, thank you very much for your time today.

Ben Whitmore: Thank you very much indeed.

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