The value fund that has outperformed

It has been a difficult period for value investors, with the market mainly driven by a narrow group of growth companies led by the FANG stocks. But it is still possible to generate some decent returns from countries and businesses that have fallen out of favour.

One fund that has successfully managed to do this is Investec Global Special Situations, which has recently been highlighted in a report from Morningstar as offering an under-the-radar strategy that could warrant further investor attention.

Since the end of 2015 the tiny £58.7 million fund has been run by Alessandro Dicorrado and Steve Woolley, who are part of Investec’s value team led by Alastair Mundy. They utilise the same investment approach as Mundy’s better known £940 million Investec UK Special Situations fundand his £1 billion Temple Bar (LON:TMPL) investment trust.

Dicorrado and Woolley use a combination of broker research and valuation-focused screens to reduce their investible universe to a shortlist of potential companies, and they then conduct fundamental research to narrow it down to a portfolio of about 40 names.

At the end of June they had 44 separate holdings with the 10 largest accounting for 38.1% of the assets. These included the likes of Capita, Bank of America, Citigroup, Deere & Co, and Microsoft.

The fund has delivered some impressive returns

The fund has delivered some impressive returns, despite value stocks generally underperforming. In 2016 it was up 36.8% and it then followed this up with an 18% gain in 2017, although year-to-date the return is a more modest 2.7%. This suggests that the managers have added considerable value via their stock selection decisions.

During the quarter to the end of June, four stocks each contributed more than 50 basis points of outperformance with one of them being the outsourcer Capita, whose share price has recovered strongly since its profit warning earlier in the year. The others were Signet Jewellers and Welbilt, which both released positive results, and Worley Parsons that provides support services to the oil & gas industry.

Relative to the MSCI World benchmark, the fund is most heavily overweight in the UK where its 26% allocation is 20% more than an index neutral position would suggest. This is because the managers believe that the UK is one of the cheapest of all the developed markets and has some very attractive investment opportunities.

The most underweight country relative to the benchmark is the US

The most underweight country relative to the benchmark is the US, although at 9% less than the index it still accounts for 45% of the portfolio’s assets. Holdings in American Financials like Bank of America and Citigroup have benefited from rising interest rates and President Trump’s corporate tax reforms.

Dicorrado and Woolley say that they will continue to be disciplined in not overpaying for businesses and will only look for investment opportunities where they see genuine value. They are currently finding the best opportunities in the financials and energy sectors and in out-of-favour areas like the UK and Emerging Markets.

Investec Global Special Situationshas done exceptionally well in what has been a difficult environment for value investors. Sooner or later the tech-led growth rally will come unstuck, and when it does it is likely that the hot money will flow into the sort of value stocks that the managers seem so adept at spotting.