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Which Sectors are Value Investors Favouring?

Asset allocators are beginning to tilt their portfolios towards value. We reveal the stocks picked by the top value fund managers

David Brenchley 16 April, 2018 | 10:10AM

iron ore mine, miners, mining, value investing

Value investing has been out of favour for some time. We have seen spells of good performance – in late 2016, for example – but they have been short lived.

But this may be about to change; many asset allocators taking a value tilt in recent months. Jon Husselbee, head of multi-asset at Liontrust, has skewed his portfolios towards value since the end of last year.

"Whether it works today or tomorrow, I'm not really bothered. Over the next 12 to 18 months, what we know is we've bought those cheaper assets and at some point those cheaper assets will be recognised," he says.

Likewise, in their newly launched portfolios, the Schroders multi-manager team has begun to favour value funds in the regions they see as offering attractive valuations.

Their Dynamic Planner funds have one passive equity play in each region. But the US is the only space where an index tracker represents their sole exposure.

“The US market has been the leader of this bull market, so looks quite vulnerable at the moment. We’re underweight that market and don’t think the opportunity set looks that attractive so we’re quite happy to use passive exposure there,” says manager Joe Le Jehan.

The team does see “pockets of value”, though, including in Europe and Japan. “These are areas that haven’t done well, but as inflation comes through should perform quite well,” he adds. Here, they prefer value-oriented funds.

In the UK, too, they like value. Le Jehan's co-manager Robin McDonald notes that while value performed poorly in general last year, the UK was “a particularly vicious market for value guys”. There were plenty of value traps around in the UK in sectors like retail and utilities, he notes.

Mining and banks were two areas that did well, so those value managers that shy away from the former, like Investec’s Alistair Mundy had a particularly bad year.

“You’re left with this set up now where if the UK economy positively surprises relative to expectations it’s one of the major markets today that actually from a valuation perspective doesn’t look egregious,” says McDonald.

Value Fund Picks

Of the active equity funds the team favours currently, seven screen as large-cap value biased, according to Morningstar’s Style Box. These include three UK funds, the Morningstar Bronze Rated pair of Schroder Income and Majedie UK Equity; and Mundy’s Silver Rated Investec UK Special Situations.

Across the globe, we also have the Gold Rated Man GLG Japan CoreAlpha; and the unrated trio of Hermes Asia ex Japan Equity, Artemis Global Emerging Markets and RWC Income Opportunities.

Top Value Stock Picks of the Professionals

We took a look under the value of all seven to find out which sectors value managers are favouring currently, using the Morningstar X-Ray Tool.

Basic materials and energy are the biggest areas of interest, with our funds 5.59% and 4.5% overweight to these sectors respectively.

That’s led by the Artemis fund, which holds South Korean chemicals company LG Chem (051910) and Brazilian iron ore and nickel miner Vale (VALE3) in its top 10. The Hermes fund holds fellow South Korean firm Hyundai Steel (004020), while Investec UK Special Situations has builders’ merchants Grafton (GFTU) and Travis Perkins (TPK).

Unsurprisingly, the UK-focused funds lead the way on the energy front, with all three having a top 10 position in BP (BP.) and the Majedie and Investec funds also liking Shell (RDSB). RWC also holds both of the UK oil majors, as well as their European peers Total (FP) and Eni (ENI).

Financial services is a more modest overweight than one might expect for what is generally considered a fertile area for value stockpickers. Though many are now understanding the investment case for banks more, with repaired balance sheets and rising interest rates providing a decent tailwind.

UK banks HSBC (HSBA), Barclays (BARC) and RBS (RBS) feature; popular high-street lender Lloyds (LLOY) doesn’t. Outside of the banking space, insurers are also preferred, through the likes of Aviva (AV.) in the UK and China’s Ping An Insurance (601318).

On the consumer cyclical side, Pearson (PSON), the former publisher of the Financial Times, is popular with Schroder Income despite its recent profits warnings. Japan and China funds tend to like this area, with both countries having a growing and wealthier middle-class population.

As a result, Japanese carmakers Toyota (7203) and Honda (7267); and e-commerce giant Alibaba (BABA) also feature.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Alibaba Group Holding Ltd ADR169.43 USD-2.11
Artemis Global Emerging Mkts I Acc GBP1.39 GBP0.60-
Aviva PLC521.96 GBX-0.99
Barclays PLC213.05 GBX-1.09
BP PLC523.86 GBX-1.83
Eni SpA15.85 EUR-1.11
Grafton Group PLC753.50 GBX-0.20-
Hermes Asia Ex Japan Equity F GBP Acc2.58 GBP0.26
Honda Motor Co Ltd3,785.00 JPY1.20
HSBC Holdings PLC707.55 GBX-0.63
Hyundai Steel Co54,500.00 KRW0.00-
Investec UK Special Situations I Acc Net197.72 GBP0.17
LG Chem Ltd352,500.00 KRW0.00-
Lloyds Banking Group PLC65.15 GBX-1.46
Majedie UK Equity X Acc1.82 GBP0.22
Man GLG Japan CoreAlpha Profl Acc C190.02 GBP0.97
Pearson PLC796.40 GBX1.35
Ping An Insurance (Group) Co. of China Ltd65.50 RMB-1.59
Royal Bank of Scotland Group (The) PLC272.00 GBX-1.31
Royal Dutch Shell PLC B2,585.24 GBX-0.85
RWC Income Opportunities Fund R GBP Acc152.62 GBP0.73
Schroder Income Fd Z Acc102.50 GBP-0.19
Total SA51.15 EUR-1.33
Toyota Motor Corp7,168.00 JPY0.82
Travis Perkins PLC1,292.00 GBX0.23-
Vale SA48.31 BRL0.00-
About Author David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk