The investment strategy tipped to shine in 2017

The past decade has been a dismal period for value investors, but there are signs that a reversal in fortunes has started to play out.

From the start of the year up to the end of November the MSCI World Value Index outstripped the MSCI World Growth index by 7 percentage points. Over the long run, value investing has managed to gain an edge over growth investing.

According to Orbis, a fund manager that specialises in value investing, from 1975 to 2006 value shares beat growth shares by 3.4 per cent annually on average. That number, however, falls to 2.1 per cent when the last 10 years are included.

Since the financial crisis, quantitative easing (QE) has been blamed for putting value investing in the shade. QE has made stock markets much more correlated, leading stocks to rise and fall together in tandem.

VALUE INVESTING COMEBACK

This has favoured the momentum approach, and made life more difficult for investors who follow an investment discipline based on hunting for shares that have been mispriced by the market.

The idea behind value investing is that a catalyst will occur to revive an underpriced company's financial fortunes, in the form of a restructuring, refinancing or management change that increase its earnings and dividend.

The comeback in value investing is not only being tipped by specialist value fund managers talking up their own books. Various multi-managers and financial advisers have also added their endorsements to the strategy.

According to Marcus Brookes, head of multi-manager at Schroders, one of the reasons behind this change in the fortunes for value investing is the shift in expectations towards better nominal growth.

When economic growth is healthy and interest rates are on the rise, cyclical and more economically sensitive stocks - which tend to fit the value description - generally thrive because investors feel more comfortable boosting risk.

During a downturn, the opposite plays out, as in the flight to safety investors prefer high-quality names.

FUND PICKS TO BENEFIT

Brookes picks out Investec Special Situations, GAM UK Diversified, Invesco Perpetual European Equity and Man GLG Japan Core Alpha as four value fund managers that he rates.

'With higher inflation pretty well assured for the first half of 2017, Donald Trump's election has (rightly or wrongly) now given the market a more pro-growth narrative on top. The majority of our equity assets are currently concentrated on the value style.

'Our view is that there's a window of opportunity between now and the next recession to benefit from a period of mean reversion, as the extreme crowding in bond proxies dissipates and owners of those assets suffer drawdowns,' says Brookes.

Ben Yearsley, co-founder of Wealth Club, agrees that value could come back into fashion in 2017.

He adds: 'Don't forget that as a strategy value has largely outperformed growth over the long term - with periods of underperformance coming typically when we are in a rate-cutting environment.'

Yearsley says he has been adding to value-style strategies, including GAM Global Diversified and JO Hambro UK Dynamic.

Meanwhile, Ben Willis of wealth manager Whitechurch Securities favours Neptune European Opportunities, managed by Rob Burnett.

He says the manager's value style of investing has been out of favour for nearly a decade, but with inflation expectations raised, value has begun to come back into favour.

'Burnett has had a good year, largely due to his big overweight to banks. Could this be the inflection point for value? Interest rates have hit a floor and are expected to go up in the US. A large headwind for value is removed,' says Willis.

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