Shares I’m backing to play the UK value revival

Sam Benstead sits down with Ben Whitmore of Brickwood Asset Management.

The veteran value investor recently left Jupiter Asset Management to set up his own fund manager to run two value funds: TM Brickwood UK Value and TM Brickwood Global Value.

Whitmore gives details on his investment process, what constitutes a “value” share, and which companies he's been buying and selling recently.

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Sam Benstead, fixed income lead, interactive investor: Hello and welcome to the latest Insider Interview. Our guest today is Ben Whitmore, manager of the TM Brickwood UK Value and TM Brickwood Global Value funds. Ben, thank you very much for coming to the studio.

Ben Whitmore, manager of the TM Brickwood UK Value and TM Brickwood Global Value funds: Sam, thank you very much indeed for having me.

Sam Benstead: You've recently started your new firm, Brickwood Asset Management, and before that you were managing money at Jupiter. So, what was behind the decision to launch your own venture?

Ben Whitmore: Yes, well, it wasn't just myself. There are four partners and now eight of us in total. We felt that there was an opportunity to have a firm solely concentrating, focusing everything we can, on value investing. And if we can do that specialisation of focus, we think that over time that will lead to hopefully better investment returns, better client service, just by having that laser focus on value investing with the whole thrust of the organisation on value investing.

Sam Benstead: You had a big following at Jupiter. Are you now managing money in the same way at Brickwood?

Ben Whitmore: Yes, exactly the same approach. We're value investors and we are always trying to do that better. So, we're always trying to enhance our investment process. But at the core, as you said, it's value investing. And by that we mean that we fundamentally believe, and the evidence shows, that the starting valuation of a security is very, very important to the investment return.

Sam Benstead: You're a value investor, but what does value investing mean to you?

Ben Whitmore: Value investing broadly goes back to Ben Graham. But over the years, his sort of greatest pupil, if you like, Warren Buffett, has espoused value investing more about buying great quality businesses at fair prices, whereas Ben Graham was probably more about buying average businesses at discounts.

For us, we use two screens. We're looking for low valuation and that's based off the CAPE, the cyclically adjusted price-to-earnings ratio over 10 years. So, what are businesses that are lowly valued over 10-year average earnings?

We also use a green/black screen and that is the best combination of valuation and returns. So, if you like, we're looking for businesses that are at a discount. Now, that might be a good quality business at a fair price or it might be an average business at a low price.

I think the key thing is that value is always a combination of quality and price and so what we want to do is we want to make sure that we're always thinking about that trade-off and moving the odds much more in our favour.

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Sam Benstead: You run the UK Value fund and the Global Value fund, but how do these funds differ?

Ben Whitmore: Yes, you're absolutely right. We've got the Brickwood UK Value fund, which is co-managed by myself and Kevin Murphy, and we've got the Brickwood Global Value fund, which is co-managed by myself and Dermot Murphy.

Between the three of us we've got over 60 years of dedicated value investing experience. I worked with Dermot for over 10 years at Jupiter. I used to work with Kevin, his brother, at Schroders. Kevin was the co-head of the Schroders' Global Value Team, so we think the three of us together, that resource is very strong as a team.

When it comes to the individual funds, for the UK fund, over 90% is invested in UK-listed securities, as you'd probably expect, and the Global Value fund is clearly spread around the world, so that's got roughly about 15% in America, 20% in the UK, over 30% in Europe, nearly 10% in Japan and about 15% in other areas such as Latin America and Hong Kong. We've got a holding in Indonesia, [and] so much more spread around the world.

Sam Benstead: And if someone was looking at both funds, which one should they be considering and why?

Ben Whitmore: Both of them at their heart clearly have a strong valuation discipline, so they're both made up of securities that are very lowly valued. To put that into context, we think about CAPE yields for markets. So, that's the cyclically adjusted price to earnings, but expressed as a yield. For example, for the American market, the CAPE yield there is about 2.5. The UK market is about 6.5.

Whereas the UK fund and the global value fund both have CAPE yields in double digits, so they are much more lowly valued than the industry average is, and so all investors should expect that for both funds.

Now clearly, the global value fund, though, is much more broadly spread. The UK fund is reasonably spread, but clearly it's fishing from a pool of, say, 250, 300 of the large and medium-sized companies in the UK.

Whereas the global value fund is fishing in predominantly developed [markets], in some emerging markets [too], but spread across the world. So, it's much more spread, but the investment philosophy, the investment process, are all the same.

Sam Benstead: Are there any companies that you've carried over from Jupiter, and are there any new positions in the Brickwood funds?

Ben Whitmore: Yes, so if we take the UK value fund, one of the positions we've carried over is Hammerson (LSE:HMSO). It had its problems a few years ago. They've restructured the balance sheet and that is now focused on, really, the main shopping centres in the UK.

Why would we be interested in that? Well, the yield on shopping centres [in the] UK is very attractive. People don't like shopping centres in the UK, they don't like commercial property, and what we think there is that you can buy that asset at a very attractive price for some of the absolute best shopping centres in the UK.

While the sort of tertiary shopping centres have gone by the way with the move online, the best shopping centres are actually attracting ever greater footfall. People like going to the top shopping destinations, and so actually we think that the fears there are sort of misplaced now.

A new share in the UK value fund would be JD Sports Fashion (LSE:JD.). That is the global leader in basically the merchandising and selling of trainers worldwide and also athleisure clothing. That business trades on a p/e of just seven. It's exceptionally lowly valued because people are worried about predominantly an economic slowdown across the world.

Second, one of its bigger customer suppliers, Nike, is going through its own issues. And third, there's also a broader worry for all businesses, something around tariffs.

And what we think is that those worries are more than encapsulated [in the] exceptionally low valuation, but also it is the world leader, it's spread across the world, and we think that's a much stronger franchise than the market gives it credit for.

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Sam Benstead: Value is doing very well at the moment. Over the past decade or so, it's been more growth-focused funds or index funds that have been outperforming, but this year, value is coming back. What's behind that change and can it continue?

Ben Whitmore: I think if we take a step back, the reason why we're value investors is that over time the purchase of lowly value securities has on average delivered above average returns. You can see that in the evidence going back 50, 100 years, 130 years. It's very, very clear.

But one of the things that comes with value investing is that it doesn't always work. There are periods when it's out of favour and, as you mentioned, we've had one of those periods. There was also a period in the late 1990s. There are always periods where the style of value investing is out of favour. It doesn't work every year, but it's very powerful over the medium and long term. And I think that's partly a function now, so, the shares which value investors are attracted to, they've rebounded quite strongly.

The fears have not proven to be as bad people are worried about. Take, for example, banks. A lot of European banks are up almost 100% in the last 12 to 18 months, and the fears have gone away.

A lot of it is driven by the starting valuation. If the starting evaluation is very low, you don't need much in the way of good news to make a good investment return.

So, what I think the really important thing is, as the manager of these two value funds, me and the team, the key thing is to keep that philosophy, keep that process, putting it into practice, and over time, you'll deliver good investment returns.

Sam Benstead: Ben, thanks for coming into the studio.

Ben Whitmore: Thanks very much indeed.

Sam Benstead: And that's all we've got time for today. You can check out more Insider Interviews on our YouTube channel, where you can like, comment, and subscribe. See you next time.