Five value funds your portfolio is probably missing (but shouldn’t be)

Investing in funds with a global remit is the new normal for investors, with our top 10 lists of the most-bought funds and investment trusts dominated by global strategies.  

They include the Vanguard LifeStrategy range, as well as FTSE All World and MSCI World trackers, such as Fidelity Index World, iShares Core MSCI World or HSBC FTSE All World Index. Active funds also make the list, such as Scottish Mortgage, Fundsmith Equity and Alliance Trust.  

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However, global funds tend to have one thing in common: they have large allocations to US technology shares, which makes the portfolios expensive on a price-to-earnings (p/e) basis. 

The success of America’s top stocks – such as Apple and Microsoft – has made them a large part of the index, and meant that active funds that did not own them have performed worse than their benchmarks.  

The consequence is that portfolios may have become skewed towards growth shares, and away from undervalued parts of the market that some argue hold the key to investment success over the long term.  

But while out of favour, value investing is still being practised by plenty of fund managers – if you know where to look.

We explore some options for investors looking to add cheap shares to portfolios, rather than following the crowd into yesterday’s winners. 

Dodge & Cox Worldwide Global Stock 

One global value option is Dodge & Cox Worldwide Global Stock fund, one of ii’s Super 60 investment ideas. Given the focus on cheap shares and management’s contrarian streak, ii fund analyst Alex Watts says the portfolio does diverge a good deal from the MSCI All Country World benchmark and its global equity peers, from a stock, sector and geographic perspective. It has a team-based approach, which minimises key-person risk.  

Watts says: “For example, while Alphabet is a top holding, the fund largely steers clear of expensive technology names – with only 4% exposure (19% underweight). Instead, they have long found rafts of value opportunities across financials – 30% (14% overweight) and healthcare – 18% (7% overweight).  

“Further, the portfolio goes against consensus by weighting 50% to the US, one of the lowest weightings compared to its global peers and near 14% underweight versus benchmark. Meanwhile, the allocation of 9% to the more meagrely valued UK market is triple the benchmark weighting.” 

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Its p/e ratio is just 12 times, which is about the same as the UK market, but compares very favourable to the MSCI World index’s 17.8 times. 

Since the fund’s launch in December 2009, it has risen 363%, which is only just behind the 396% gain of the MSCI World index.  

However, Watts warns that because it takes a very long-term view to seeking undervalued and unloved companies, this fund’s performance can be rocky.  

Ajay Vaid, senior investment research analyst at research group Square Mile, also favours Dodge & Cox Worldwide Global Stock fund. 

However, he warns that the fund’s long-term investment horizon, which places a significant emphasis on valuation, can lead to periods of heightened volatility versus the wider global equity market.   

“Nonetheless, the fund is not a pure value play so in momentum or more growth-driven markets, its performance may be more consistent than other overt value funds – a characteristic which we see as being attractive,” he concludes. 

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Wise Multi-Asset Growth  

Darius McDermott, managing director at fund research group FundCalibre, says that the universe of out-and-out global value funds has shrunk considerably in recent years, and many managers in the space who should have capitalised on undervalued tech stocks in 2022 missed the opportunity. As a result, he says investors seeking global value exposure may be better served by alternative approaches. 

One such option, he says is Wise Multi-Asset Growth. McDermott says that despite the name, the fund’s managers have a value bias. They achieve this by investing in a diversified pool of 30 to 60 underlying funds and investment trusts, with a particular focus on out-of-favour sectors. 

McDermott says that this approach positions the fund as an attractive option for investors seeking global value exposure. Top positions include value-focused investment trusts such as Fidelity Special Values and AVI Global Trust, as well as trusts on wide discounts such as Pantheon International and Aberforth Smaller Companies.  

Marlborough European Special Situations  

Investors seeking a more focused value exposure will find compelling prospects in UK and European equities, as companies in these markets are cheaper on average than those in the US.  

These markets currently trade on low valuations to their historical averages, presenting significant upside potential - particularly for funds with a value tilt, according to McDermott.  

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He points to Marlborough European Special Situations as an option in Europe. It owns 74 companies, with its largest country allocation France at 25% of the portfolio.  

While returns over three years have been poor, putting it in the bottom 25% of European funds, over 10 years it is the second-best performing Europe fund, returning 218% compared with 115% for the sector average. This shows that while its approach is currently out of favour, over the longer term it has delivered.  

Schroder Recovery 

In the UK, McDermott says that Schroder Recovery is a great option. This fund aims to deliver attractive capital growth by investing in companies that have suffered a severe business or price setback, but where the managers believe long-term prospects are good. 

“Schroder Recovery investors need a long-term investment horizon, but patience in this fund has proved rewarding,” he says.  

This approach has led it to out-of-favour names such as shopping centre group Hammerson (LSE:HMSO), miner Rio Tinto and banks NatWest, Lloyds and Barclays. It yields 4% and has returned a similar amount to the FTSE All-Share index over the past decade.  

McDermott adds: “Unlike most fund managers, this team is steadfast about not meeting company management teams. The managers believe the full story of a company can be found in the financial statements and not what they hear from the directors.”  

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ES River & Mercantile UK Recovery 

This is another option for investors seeking undervalued UK firms. John Monaghan, of Square Mile, says ES River & Mercantile UK Recovery manager Hugh Sergeant follows an investment philosophy centred around three key concepts: potential, valuation and timing.  

“In essence, this holds that a company’s future potential depends on where it is in its life cycle, although ultimately it is looking for companies with the ability to create above average value for shareholders,” he says.  

An “adventurous” option on ii’s Super 60 list, Watts says the approach has a number of positives, including the experience of Sergeant, who has run the fund for nearly 20 years,  and the detailed quantitative assessments that are made at the stock and portfolio levels. 

“As a higher-risk UK equity fund it is a robust choice,” Watts says. The top positions currently are BP, Unilever and Shell, at around 2% of the portfolio each.