Investing in areas of the market that are out of favour can reap good returns over time - and value stocks, which fall into real economy segments such as energy, mining, banks and industrials - currently fit into this category.
- Targets value stocks, which could do well
- Good record over recent years
- Can invest in smaller companies
- Poor performance longer term
- Volatility
Peter Toogood, investment director at research company City Financial, believes that a rotation from growth to value could occur in one of two ways. "The first is a complete market washout, reminiscent of 2008, when all sectors of the market fell in tandem but value stocks outperformed – they were cheaper and no one owned them," he says. "The second is that global economic doomsayers are wrong and economic growth revives in the second half of the year.
"We stand by the assertion that for those who are inclined to invest long-term money, value managers are the way to go. The price action in recent months highlights the fact that value is slowly winning the battle."
If you are persuaded by this argument too, funds with a value focus include JPM UK Dynamic (GB00B6X9BB33).
"This has a process that incorporates value criteria through its objective screen-based, behavioural approach, and it has been increasing the value component in its portfolio recently," says Mr Toogood.
JPM UK Dynamic's managers - John Baker, Jonathan Ingram and Blake Crawford - invest on the premise that investors are often overconfident, causing them to be either overly optimistic or pessimistic on a stock's future. This causes share prices to over or undervalue the underlying company. They aim to exploit this by targeting fundamentally sound companies which they feel other investors have unduly undervalued. They specifically target profitable businesses with sustainable earnings and management teams that are disciplined with their capital expenditure. They believe managements that seek to grow a firm beyond its optimum size often lose focus on shareholder returns.
JPM UK Dynamic includes resources stocks such as Royal Dutch Shell (RDSB), BP (BP.) and Rio Tinto (RIO) in its top 10 holdings. Oil and gas, basic materials and industrials account for 15.2 per cent of assets.
Because of the fund's small size - £164.3m - it can also take meaningful positions in small and medium-sized companies, widening the options available to its managers.
JPMorgan says that this fund could suit investors looking for a higher risk/return strategy as part of a diversified portfolio, or investors looking to enhance long-term returns. JPMorgan advises holding it for at least five years.
JPM UK Dynamic performed poorly between 2007 and 2012 due to poor stock selection, according to Heather Ferguson, investment analyst at Hargreaves Lansdown. However, since then the fund has performed much better, and over one, three, and five years beats its benchmark the FTSE All Share, and the Investment Association UK All Companies sector average. The investment team was strengthened with the addition of Mr Crawford in 2013.
Because JPM UK Dynamic can invest in higher risk smaller and medium sized companies, and moves aggressively between stocks and sectors, it tends to be more volatile than the average UK All Companies fund, according to Ms Ferguson.
And value-focused funds which take this approach will differ from the market and might have periods of underperformance.
However, if you have a long-term investment horizon and high risk appetite, and wish to allocate a small portion of your portfolio toareas that could enjoy a strong turnaround, then JPMorgan Dynamic could be a good bet. Buy.
JPMORGAN UK DYNAMIC (GB00B6X9BB33) | |||
---|---|---|---|
PRICE | 159p | SHARPE RATIO | 0.91 |
IA SECTOR | UK All Companies | STANDARD DEVIATION | 11.08% |
FUND TYPE | Open-ended investment company | MEAN RETURN | 11.09% |
FUND SIZE | £164.3m | YIELD | 2.50% |
SET UP DATE | 01/10/2000* | ONGOING CHARGE | 0.93% |
MANAGERS START DATE | 31-Mar-07/12-Aug-13 | MORE DETAILS | am.jpmorgan.com |
Source: Morningstar, JPMorgan
Performance
1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) | 10-year cumulative total return (%) | |
---|---|---|---|---|
JPM UK Dynamic C Acc | -1.4 | 32.1 | 54.6 | 84.1 |
FTSE All Share TR GBP | -7.4 | 12.4 | 28.2 | 59.4 |
IA UK All Companies sector average | -5.4 | 18.6 | 36.2 | 60.8 |
Source: Morningstar as at 26 February 2016
Top 10 holdings as at 31 January 2016 (%)
Royal Dutch Shell | 4.7 |
BT | 4 |
British American Tobacco | 3.6 |
Imperial Tobacco | 3.6 |
Reckitt Benckiser | 3.2 |
BP | 3.2 |
ITV | 3.00 |
Unilever | 2.90 |
Prudential | 2.70 |
Rio Tinto | 2.5 |
Sector breakdown (%)
Consumer goods | 26.8 |
Consumer services | 26.7 |
Financials | 16.2 |
Oil & gas | 8.9 |
Telecommunications | 4 |
Basic materials | 3.3 |
Industrials | 3 |
Technology | 1.5 |
Healthcare | 0.4 |
Cash | 9.2 |