The value funds that could benefit from higher interest rates

2 mins. to read
The value funds that could benefit from higher interest rates
Master Investor Magazine 40 cover

Never miss an issue of Master Investor Magazine – sign-up now for free!

Read the latest Master Investor Magazine

In the last few years growth stocks have consistently outperformed value, but the recent increase in interest rates by the Bank of England could indicate a turning point in this cyclical relationship. Historically, a rising interest rate environment has tended to favour value, so now could be the perfect time to increase your exposure to UK value funds.  

Value investors look for stocks where they believe the business is worth more than the market capitalisation, whereas growth investors target companies that can grow their sales and earnings much faster than the economy’s growth rate.

Growth companies tend to do well when economic growth is slow and inflation and interest rates are low. This has been the case since the 2008/09 financial crisis, a decade during which the MSCI World Growth Index has outperformed its value equivalent. 

Value stocks tend to outperform when interest rates and economic growth rise

The data suggests that value stocks tend to outperform when interest rates and economic growth rise in unison, as many of these companies are sensitive to the economic cycle and do better when the economy is improving.

Last week’s increase in interest rates by the Bank of England was only the second time that they have raised rates in a decade, but if you expect growth, inflation and interest rates to all start heading higher you might want to consider increasing your exposure to UK value funds.

A decent option would be Investec UK Special Situations, which is managed by the highly respected Alastair Mundy, who is regarded as one of the most disciplined and successful contrarian investors operating in the UK market. Mundy looks for stocks that are unloved and undervalued and typically does very well during turning points in investor sentiment. His £941 million fund has generated annualised returns of 10.4% per annum over the last decade.

Not the most comfortable of strategies

Another possibility is Schroder Recovery, which has been run by Kevin Murphy and Nick Kirrage since 2006. The £1.2 billion fund targets companies that the managers consider to be valued at less than their true worth and that are waiting for a positive re-rating. It is not the most comfortable of strategies, although the fund has returned a highly creditable 232% over ten years. 

A smaller alternative would be the £273 million R&M UK Recovery managed by the highly experienced Hugh Sergeant. Sergeant looks for companies where he thinks the Board have the capability to turn things round and is prepared to back his conviction by adding to the holdings at knock down prices during periods of extreme volatility. It is quite a diversified portfolio with 227 different holdings and has returned 94% over five years.

If you think it is too early to go all out for value stocks at the moment you might want to consider the Jupiter Absolute Return fund. This highly regarded long-short fund operates a number of different strategies, one of which is to be long value and short growth, although the manager is planning to ‘evolve with the conditions rather than acting pre-emptively’ to avoid being caught out.

Comments (0)

Leave a Reply

Your email address will not be published. Required fields are marked *