Don’t be shy, ask ii…which funds and trusts invest in value shares?

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Mr Preston asks: I’m interested in value stocks. Which funds and trusts should I be looking at?

Kyle Caldwell (pictured above), collectives editor at interactive investor, says: value investing is an investment style that is based on finding shares that appear to be mispriced by the market relative to the firm’s fundamental value – including how much money it makes and how much excess cash it generates.  

Such out of favour companies tend to have a low price/earnings (PE) ratio, which compares a company's value with its profits. If the company pays dividends, it will tend to have a high dividend yield.

As well as scrutinising the valuation to assess whether it is good value, or cheap for a good reason, value fund managers look for a potential catalyst that may revive the share price – such as a restructuring of the businesses or the appointment of a new management team.

Value shares tend to be more economically sensitive – so when the economy is performing well this is a tailwind and vice versa.

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At the moment, value shares are enjoying a renaissance, having underperformed growth shares for over a decade. Growth shares, including technology companies, have more expensive valuations than value shares, and those valuations are based on expectations of high profits in the future. Value shares, however, have valuations that are more reflective of their current earnings.

High levels of inflation and rising interest rates have pushed investors to prioritise profits today over profits tomorrow, prompting a fall in technology shares and increased demand for value shares. But as my colleague Sam Benstead recently pointed out, so far in 2022 this has not necessarily translated into strong performance for funds that invest in value shares – as some value sectors, such as banks, have not performed well. Instead, oil and mining companies have been leading the relatively few stock market winners.

Most funds with ‘value’ or ‘recovery’ in their fund name invest in value shares.

The UK has more value fund options than other markets, perhaps a reflection of the FTSE 100 index having a bias towards such companies.

Examples of UK value funds include ES R&M UK Recovery (a member of interactive investor’s Super 60 rated list) Man GLG Undervalued Assets, Polar Capital UK Value Opportunities, Premier Miton UK Value Opportunities, Dimensional UK Value, JPM UK Equity Value, Schroder Recovery, Slater Recovery and M&G Recovery.

Four UK investment trusts that invest in value shares are Temple Bar (LSE:TMPL), Merchants Trust (LSE:MRCH), Fidelity Special Values (LSE:FSV) and Aberforth Smaller Companies (LSE:ASL).

Some ‘special situations’ funds also hunt for bargains. Examples include Super 60 member Jupiter UK Special Situations (who we interviewed earlier this year, check out the two videos below). Other options include Fidelity Special Situations and Ninety One UK Special Situations.

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However, not all special situation funds invest in value shares. Some instead target smaller company shares.

Global value funds include Super 60 member Artemis SmartGARP Global Eqiuty, Jupiter Global Value Equity, Schroder Global Recovery, Ninety One Global Special Situations and Overstone Global Equity Income.

For investment trusts, Murray International (LSE:MYI), also in the Super 60, is another option. 

Realistically, any potential prolonged market rotation towards value is unlikely to go in a straight line. As ever, balance is key. Therefore, it is prudent to mix and match between growth and value strategies. Doing so, will help investors achieve greater levels of diversification.