Stock secrets of where value fund managers are hunting

Stock markets have short memories. In April, President Donald Trump’s “Liberation Day” announcement of global trade tariffs plunged markets into chaos; the sell-offs saw $8.6 trillion (£6.4 trillion) wiped off the value of equities globally over the following week, with double-digit falls from many major world indices. Yet barely four months on, world markets now stand at all-time highs – indices in the UK, the US, Japan, Hong Kong and across continental Europe have all eclipsed previous records.

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Investors will welcome this rapid recovery. But it does give rise to questions about whether markets – or at least certain sectors and stocks – are now over-priced? And for investors who focus on value when building portfolios, finding new opportunities is bound to be harder in current market conditions. Where will they find stock that the market as a whole has overlooked?

The good news, say fund managers who specialise in value investment strategies, is that there are still opportunities to buy decent-priced stocks – even in some of the markets that have surged most dramatically in recent months. Investors simply have to be discerning.

“There is still value to be found if you look hard enough,” says Ian Lance, a partner in the value and income team at fund manager Redwheel and co-manager of Temple Bar Ord (LSE:TMPL) Investment Trust. “The key is to differentiate in your search.”

In the UK, Lance points out that while the FTSE 100 index is now at an all-time high, it has delivered returns of only 82% over the past 10 years (figures at time of writing in mid-August), compared to a 282% gain from the S&P 500 index in the US. The average stock in the latter index currently trades on a price to earnings (PE) multiple of 24 times; the equivalent figure for the FTSE 100 is only 14 times.

“Here, it is still possible to buy stocks on single-digit PE ratios,” Lance adds. “NatWest Group (LSE:NWG) is on 9 times’ earnings, for example, while GSK (LSE:GSK) trades on 8 times’; there are also stocks such as Aviva (LSE:AV.) on a dividend yield of 6%.”

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Similar exceptions apply in the US, Lance says. “There has been a huge bifurcation in returns from different sectors,” he points out. “The large technology companies, as measured by the Bloomberg Magnificent Seven Total Return Index, are up 2,372% over the past 10 years; the laggards have been sectors such as Energy and Healthcare, up 89% and 82% respectively over the same period.”

Simon Gergel, portfolio manager at Merchants Trust Ord (LSE:MRCH), shares that analysis. “The UK stock market remains polarised, so while many shares are hitting new highs, there are plenty of others trading on depressed multiples,” he says. “Short-term earnings momentum – companies seeing rising earnings forecasts – has been more important for share prices than intrinsic value, but that creates opportunities for investors willing to take a medium-term view.”

Housebuilding - and associated sub-sectors such as construction and materials – is one area of the market that Gergel believes currently looks undervalued. With the government committed to supporting new housing builds and easing planning laws, and mortgage costs coming down as interest rates decline, there is potential for that to correct to investors’ benefit, he argues.

“Another area where we see opportunity is real estate,” Gergel adds. “We are seeing consolidation in healthcare property, student accommodation and other sub-sectors, which should lead to scale economies, at a time when many real estate stocks are trading on low valuations compared to historical norms; falling interest rates and bond yields should also have a positive impact.”

At Fidelity Special Values Ord (LSE:FSV), meanwhile, Alex Wright is one manager who would have particularly cause for concern were value opportunities to dry up. The fund’s core mandate is to look for unloved companies with the potential to re-rate as they move into a period of positive change. Fortunately, Wright doesn’t think he needs to start worrying.

“Compelling opportunities remain,” he argues. “The UK market offers a rich pool of investment opportunities for diligent investors, combining strong earnings growth, high dividend yields and low valuations.”

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Financials remain an important area of interest for Fidelity Special Values, although the fund has recently trimmed holdings in Barclays (LSE:BARC) and AIB Group (LSE:AIBG), in favour of an increased exposure to Lloyds Banking Group (LSE:LLOY). Wright also believes there is value to be found in consumer-facing businesses in the UK, and the fund holds positions in retailers such as Frasers Group (LSE:FRAS), and housing-related stocks such as Genuit Group (LSE:GEN) and Travis Perkins (LSE:TPK).

“Consumers have been saving heavily over the last two years, with consumption levels historically low due to concerns about inflation, interest rates and ongoing geopolitical conflict,” Wright argues. “Although these issues persist, recent positive profit upgrades from retailers such as Halfords Group (LSE:HFD) and DFS Furniture (LSE:DFS) have been encouraging.”

More broadly, Wright suggests investors look beyond marquee names, with more value to be found further down the market-cap spectrum. Mid-cap and small-cap companies in the UK, on average, are still trading on valuations below their long-term averages, he points out.

Further afield, Andrew Lapping, chief investment officer at Ranmore Fund Management, the value-oriented firm that runs the Ranmore Global Equity fund, says this year has seen his fund reduce its exposure to Western markets in favour of larger holdings in Asia. Ranmore’s approach is stock specific, rather than seeking to hit targets for regional exposures, so that shift reflects the geographical nature of the companies where it has been finding value.

“One area where we’ve been finding quite a lot of value is the Korean stock market,” Lapping says. “In Korea itself, local investors have been more interested in the US technology bandwagon than investing domestically, and it’s quite a difficult market for international investors to get into; the country has also had some political turbulence that has worried investors.” With all those factors hitting market sentiment, Korea offers affordable opportunities to buy companies with strong balance sheets, good cash flows and generous dividends, he adds.

In Japan, meanwhile, Lapping says that it is international enthusiasm for blue-chip shares that has really powered the country’s stock market resurgence over the past year or so. “We’re now finding value in some of the small- and mid-cap industrial companies that are off-index,” he explains. “One has to be cautious, but the dividend yields on most stocks in Japan still exceed their European counterparts.”

Elsewhere, Ranmore Global Equity is still an investor in Brazil, although Lapping warns the valuation opportunity on its stock market can be undermined by the strength of the Brazilian currency. However, it has reduced its exposure to European financials, with fund holdings such as Societe Generale SA (EURONEXT:GLE) having doubled over the past 12 months.

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Not that the fund is eschewing UK stocks completely – like other managers, Ranmore continues to find value on the domestic market. In particular, Lapping shares Wright’s view that certain consumer businesses now look attractively priced.

“Associated British Foods (LSE:ABF) is one of our biggest holdings, with a decent balance sheet, a management structure where the company is run by a family who really care about the long term, and decent cash-flow generation,” he says.

“We also like Greggs (LSE:GRG), even though some people worry that its growth has slowed, because it’s just really hard to find businesses like that. And we’re supporters of B&M European Value Retail SA (LSE:BME), which is a cash-generative retailer that serves a proportion of the population that is not super wealthy.”

Eagle-eyed investors will spot a theme there: all three UK businesses name-checked by Lapping are at what might be described as the value end of the consumer sector, where at least part of their proposition is a low price.

On the high street, even in this period of higher inflation, it is still possible to find bargains – the same appears to remain true of global stock markets.