There are different ways to pronounce someone deceased. It may be observed that their heart has stopped beating, or they may be declared brain dead. Many will view value investors as being in the latter category: US value stocks have now underperformed the broader equity market over one, three, five and 10 years.
That does not look like changing anytime soon: Value has lagged its parent universe by around five percentage points so far this year.
Yet by assets under management – the heart of the investment industry – value continues to beat vigorously. The three major value ETFs hold $116 billion, more than the $106 billion housed in the three primary growth ETFs.
The picture is slightly different for mutual funds, however. While $533 billion is managed by large-cap growth funds, just $196 billion resides in large-cap value strategies.
The divergence between the mutual fund and ETF numbers suggests that even if plenty of investors have kept faith with value as a style, years of disappointing returns have driven them away from active approaches in this space.
That is not to say that all value managers have struggled, of course. As the funds highlighted below show, there remain several standout options in this category – including some smaller vehicles that merit further attention.
Largest by AUM
The largest fund in this sector is unsurprisingly a Vanguard product; it will perhaps be more surprising to those who only associate the Philadelphia giant with passive funds that Windsor II, overseen by James Stetler, is not a tracker. Rather, the fund is subadvised by four active shops – Barrow, Hanley, Mewhinney & Strauss; Hotchkis and Wiley Capital Management; Lazard Asset Management; and Sanders Capital. There is also a smaller sleeve allocated to Vanguard’s own quantitative equity group.
It is important not to confuse Windsor II with the original Vanguard Windsor fund. The first of its name also has a value mandate, run by the better-known Wellington Management Company and Pzena Investment Management. Windsor has in fact outperformed Windsor II over the past one, three, five and 10 years, but has been eclipsed in size partly due to the prototype having previously been closed to new investors under former manager John Neff.
Top by total return
Look just at the top three holdings in the Barrett Opportunity fund – a defense group, a bank and an oil major, together representing more than 40% of the portfolio – and you could conclude that it was a very traditional value strategy.
This helps explain the presence of names such as Alphabet, Microsoft and Apple elsewhere in their portfolio.
‘The market currently is more focused on uncertainties related to more mature technology companies that we have invested in such as Google and Facebook than in new issues such as Spotify, the music streaming service,’ Milnamow observed.
‘However, these companies are making many acquisitions, aggressively recruiting scientific talent, and conducting basic research in order to be at the forefront of using new technologies such as artificial intelligence and quantum computing. They should have a bright future.’
Top by risk-adjusted
The Citywire AA-rated pair of John Levin and Jack Murphy from Levin Capital Strategies, who subadvise the Transamerica Large Cap Value fund, take a concentrated and contrarian approach to their portfolio.
This can be high risk, but in this case that risk has been well rewarded: the team’s manager ratio of 0.78 over the past three years is the best in the sector.
Emblematic of their philosophy are stakes in Occidental Petroleum and Post Holdings, which is behind brands such as Alpen and Shredded Wheat.
In the case of Occidental, Levin and Murphy noted its leading position in the Permian shale basin, its low cash-flow breakeven point of approximately $48 per barrel, its dividend yield of around 4.7%, and its forecast annual production growth of 5-8%. With Post, they backed its ‘proven shareholder-friendly management team’ to unlock the company’s value.
One to watch
Managers Edward Perkin and Aaron Dunn’s strategy now ranks sixth out of the 113 funds in this sector over the past year, having languished in 99th place in their peer group over the previous 12 months.
That turnaround was driven by stock selection in the industrials, consumer staples and financials spaces.
Some of the managers’ most notable recent contributors have also been out-of-index positions. CH Robinson Worldwide, for example, is a logistics provider and truck-haulage broker that has benefited from surging demand for trucking services that has outpaced supply.
In financials, a non-benchmark allocation to Swiss bank Credit Suisse generated strong returns through 2017 and January this year as its own recovery efforts – involving a greater emphasis on its wealth-management business and other areas viewed as less capital intensive – continued to improve profits.
Vanguard Value ETF
The $38 billion Vanguard Value ETF and $36.8 billion iShares Russell 1000 Value ETF are neck and neck in terms of size, despite the former having an expense ratio of 0.05% and the latter charging 0.2% – four times as much.
Given that one explanation of the value premium is that investors are irrational, that seems apt.
More importantly, the Vanguard ETF has outperformed its iShares rival by a considerable margin over the past three years to the end of May. During that period, Vanguard Value ETF returned 31.1% compared with 23.4% from the iShares Russell 1000 Value ETF.
Part of that gulf in performance is naturally derived from their different fee levels, but it also reflects their separate methodologies.
The Vanguard ETF tracks the 300-odd stocks of the CRSP US Large Cap Value index, while the iShares holds the roughly 700 names in its titular index.