It has been a year value investors would rather forget.
Value stocks have been well and truly beaten by their growth counterparts. The S&P 500 Growth index was up 21.95%, while the S&P 500 Value index was up less than half that at 9.88%, as at the end of October.
There are several reasons why, not least the hot run for FAANG stocks – Facebook, Amazon, Apple, Netflix and Google. After a strong 2016, the election of Donald Trump saw value stocks were further back in favor, but have they faded over the course of 2017 as prospects for the Trump agenda did the same.
Even so, the Great Lakes Large Cap Value fund has managed to gain 20.2% over the past year – ahead of the sector average of 17.3%, while maintaining the best risk-adjusted returns in the group over three years.
The trio run a concentrated portfolio of just 44 stocks with an average market cap of $94.3 billion.
In the third quarter of the year, the fund was overweight energy, industrials and technology. Commentary from the managers identified healthcare and energy as the top contributors to performance.
In healthcare, one holding was responsible for almost half of the relative contribution, with a 24% gain in the quarter. ‘Strong data from its pipeline coupled with its ability to defend against competition supported the strong results,’ the managers wrote.
‘Likewise, another security continues to keep biosimilar competition to a minimum while operating efficiently to generate shareholder return of almost 10% in the quarter. A third holding in the sector also gained over 10% in the quarter, making progress expanding its margins as it builds out its cardiology franchise among other initiatives.’
Value for money
In at number two is the $45.5 billion MFS Value fund, managed by Steven Gorham and Nevin Chitkara, each with about 25 years in the industry. Neither is currently rated by Citywire, although both have held either + or A ratings for every other month of 2017.
Five of the top 10 holdings as of September 30 were in financial services – JPMorgan Chase, Wells Fargo, Goldman Sachs, Citigroup and US Bancorp – which made up 30.5% of the portfolio. Healthcare was next at 15.4%, followed by consumer staples at 10.9%.
Three themes dominate the management of the fund: traditional value fund investing in high-quality large-cap companies, targeting undervalued companies with low price-to-earnings ratios or high dividend yields, and a flexible valuation approach with a strong emphasis on cash flow and returns-based methodologies.
Going against the flow
The pair have been managing money in the same contrarian way for decades. While their one-year numbers are nothing to write home about, they are top of the pack over three years and in the top 10 over five, thanks in part to a strong 2016 in which value returned to favor.
Like the MFS managers, Levin and Murphy have a big position in financials. As of September 30, 24% of the fund’s holdings were in financial services, with 15% each in consumer defensive and tech stocks.