Investors should look at fund managers that have been forgotten and overlooked rather than focusing on new fund launches as they can soon become “overvalued”, says Morningstar chief investment officer Dan Kemp.
Over the past two years value-driven managers have underperformed with quality, growth-orientated managers leading, which has led to many value managers being underrated, Kemp says.
But rather than focusing on new funds, investors should instead “focus on funds that are under appreciated”.
Kemp says: “Some funds became forgotten over the past few years as value has fallen out of favour. So we are encouraging investors to start looking again, at the research and at some of these very well established funds run by great investors, rather than chasing the latest fund launch.
“[New funds] tend to reflect trends in the markets and trends quickly become overvalued. Very seldom do people launch a fund investing in an asset class that has been unloved.”
Among the ‘unloved’ funds Kemp recommends is veteran James Salter’s Japan fund at Polar Capital.
Kemp says: “Salter is a phenomenal fund manager, sticking to his guns but he sees investors abandoning him, as he has lost around £1bn recently. He has a huge conviction on overvalued defensive assets in Japan, which are due a correction, and he is still betting on that.”
Another Japanese example is the Man GLG Japan CoreAlpha fund, which covers large-cap value stocks that have had “a tough time”, says Kemp.
The fund has lagged its benchmark, returning -10 per cent over a year, against the sector’s -1.9 per cent. However, it has returned 3.2 per cent against 4.9 per cent over a three-month period.
Kemp adds: “Another fund which we continue to wrestle with is the M&G Recovery fund. It is a fund that we still use in our portfolios, and it had a very torrid time but it really is the flagship for funds that have become unloved.
“[Fund manager Tom Dobell] hasn’t changed the way that he does things. He has been challenged by outflows and by market conditions, but he is a manager that has a very straightforward process and sticks to it.”
Chelsea Financial managing director Darius McDermott suggests Kevin Murphy and Nick Kirrage’s Schroders Recovery fund as an unloved fund. He says there has been “a huge gap” between value and growth stocks for years, but “at some stage” value is going to be back in favour.
Tilney Bestinvest managing director Jason Hollands says value investing typically works in “short sharp spurts” and can go through very prolonged periods where the patience of investors is tested.
He says: “In recent years quality growth stocks have outperformed strongly so it’s unsurprising that investors have focused on funds concentrated on these parts of the market rather than value funds.”
McDermott adds: “If you like value as an investment style now is the best time to buy. But we do live in an interesting time, with quantitative easing and all these monetary policies from central banks, so it is difficult to know when value is coming back.”